The Charitable Remainder Trust: A Valuable Financial Tool for Families Selling a Farm or Ranch
A charitable remainder trust (CRT) enables a family selling a farm or ranch to avoid tax on the sale of their land, livestock and equipment and generate lifetime income for retirement.
In addition to saving taxes and generating a lifetime income, a CRT provides several other benefits:
Potentially reduces estate taxes,
May generate an immediate income tax deduction and a state income tax credit,
Provides a vehicle to diversify assets for retirement income,
Helps support your favorite church and/or charities and
Allows you to leave behind a lasting legacy.
How it works
A donor establishes a CRT and then transfers appreciated assets – for example land, livestock, equipment – to the trust, removing the assets’ values from the donor’s estate. The trust then sells the assets, and since it is a tax-exempt entity, there are no taxes due upon the sale.
The proceeds from the sale are then invested within the trust in a manner designed to provide a lifetime income for the beneficiaries.
Two sets of beneficiaries are established, the income beneficiaries – generally the donor and his or her spouse, and the remainder beneficiaries – the charity or charities that will receive the principal, or “remainder,” of the trust after the income beneficiaries die.
One does not have to contribute their entire farm or ranch in a CRT. A portion of land and/or livestock and equipment may be contributed to and sold by a CRT with the rest of the property sold for cash and/or through a 1031 exchange.
The following is a hypothetical example of a married couple in Wyoming, both age 65, selling highly appreciated ranch land valued at $5 million through a CRT. The illustration below compares the sale of this land with and without a CRT.
For this example, we’ll assume that our donors are age 65, and the value of the land donated it $5 million. The cost basis of the property is $500,000, and the CRT payout rate is seven percent. We’ll also assume a quarterly payout schedule.
The benefits of such a CRT would be a charitable deduction of $1,113,100 and $350,000 in estimated payments in the first full year. Future payment will vary, depending on the performance of assets in the trust.
In selling the property without a CRT, $900,000 in taxes would be due, and an estimated $287,000 annual cash flow would be seen to the ranch, before taxes.
With a seven percent CRT, no taxes would be due, and estimated annual cash flow before taxes would total $350,000.
As you can see in this example, by selling their property through a charitable remainder trust, this Wyoming couple saved $900,000 in taxes and generated an additional first year retirement income of $63,000.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families selling a farm or ranch and transitioning into retirement.
For more information, call 406-582-1264 or visit solidrockwealth.com and solidrockproperty.com.