Transitioning from Ranching to Retirement
Here is an example of Wyoming ranchers using savvy financial strategies to save tax on the sale of their ranch and create passive retirement income. Perhaps you can relate to their story.
Steve and Nancy, ages 67 and 65, owned a ranch in Wyoming. Their two children were grown, had their own careers and weren’t interested in taking over the ranch. Steve and Nancy deeply loved their ranch but had an increasing desire to travel and spend more time with their kids and grandkids. Steve’s back pain was interfering more each year with his ability to operate the ranch and calving season was beginning to take a heavy toll on his health. After much emotional deliberation, they decided it was time to sell.
Throughout the years of operating their ranch, any profit from their operation went back into purchasing more land, cattle and equipment. When Steve and Nancy listed their ranch for sale, the value of their home and ranch assets represented nearly 100 percent of their net worth. The value of their land had greatly increased and based on a tax projection from their Certified Professional Accountant (CPA), Steve and Nancy faced a tax bill of over $700,000 if they were to cash out.
After several meetings with a wealth management consultant, their CPA and their attorney, Steve and Nancy decided to utilize a 1031 exchange and a charitable remainder trust (CRT) to reduce taxes on the sale and to provide retirement income.
The ranch sold for $5 million. Steve and Nancy did a 1031 exchange for $2 million into an office building leased to the Social Security Administration. This building offered a 10-year lease guaranteed by the federal government and generated a first year income, after all expenses, of $150,000. At the same time, $1.5 million worth of land, cattle and equipment was sold through a CRT. Because the CRT is a tax-exempt entity, the proceeds sold in the CRT were not subject to tax. With the help of the wealth management consultant, this $1.5 million was invested in a diversified portfolio of mutual funds within the trust for the benefit of Steve and Nancy. Steve and Nancy selected a payout rate of seven percent from the CRT, which provided them a first year income of $105,000.
Steve and Nancy paid tax on the remaining sale proceeds. This tax was reduced by the charitable deduction they received from making the gift to the CRT. They were also able to withdraw money tax-free from the sale of their home through the IRC Section 121 Personal Residence Exclusion. By using the 1031 Exchange, Charitable Remainder Trust and Personal Residence Exclusion, Steve and Nancy reduced their tax bill from over $700,000 to less than $50,000.
The net cash available after paying tax and investing in the Social Security building and CRT was $1.4 million. They used part of this cash to purchase a new home on a small acreage in Thermopolis and a second home in Cave Creek, Ariz. Something they long desired but never had the cash or time to do was to take their kids and grandkids to Disneyland. They used $15,000 to take this long awaited trip. The balance of the funds was invested in a conservative mutual fund portfolio comprised of 40 percent stock and real estate funds and 60 percent bond funds. From this portfolio, they made annual distributions of seven percent, providing a first year income of $77,000.
Steve and Nancy purchased a $1 million second-to-die life insurance policy on their lives to replace the money gifted to their CRT. Their attorney and life insurance agent helped them set up an irrevocable life insurance trust so their kids could receive the proceeds from the life insurance both income and estate tax free.
For the first time in their lives, Steve and Nancy had the ability to travel for extended periods of time. They enjoyed an annual income that far exceeded what they ever made on the ranch, and Steve didn’t have to pull calves or feed cows in the wet, cold weather to earn it. Besides enjoying a comfortable retirement and providing a large inheritance for their children, Steve and Nancy had the joy of knowing that when they both passed on, the charitable remainder trust they established would provide a large amount of money to support their church and favorite charitable organization.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families throughout the country who are selling a farm or ranch and transitioning into retirement. Nolt helps families to save tax on the sale of their farm or ranch and create passive income from the sale proceeds. There are complex rules and strict time parameters for completing a successful 1031 exchange or Charitable Remainder Trust.
For more information on these tax saving tools and other planning strategies for selling a farm or ranch, you may request a free Wealth Guide by calling 406-582-1264. For more information, visit solidrockwealth.com and solidrockproperty.com.