After the tax season, I spend a lot of time meeting with clients about the transition to the next phase of their lives. For most, that means one or more of their children takes over their farm. However, it's increasingly common for the kids to have little interest in farming. If they do not want to take over the operation, the focus of our conversation changes to maximizing post-tax benefits from the sale of assets. With new tax laws, rising interest rates and creative investment ideas, the use of Charitable Remainder Trusts (CRTs) have become more attractive.
Like its name suggests, a CRT is a trust that ultimately will provide charities with money at a set point in time. The farmer (donor) sets up a trust with a charitable intent and contributes assets to the trust to fund that intent. In exchange, the trust pays the donor money for two to 20 years. After the trust receives the assets, the trust sells them, and because the trust is charitable, it pays no tax on the sale. Upon the last payment to the donor, the remaining assets in the trust go to charities of the donor's choosing.
There are two types of CRTs, unitrust and annuity trust. Under the unitrust, the donor gets paid a percentage of assets remaining in the trust. Under the annuity trust, the payments are fixed at the time of contribution and do not depend on the assets in the trust. Which is better depends on your risk tolerance.
The unitrust is typically invested in stocks and bonds. If the market rises, the donor may receive more money because the value of assets in the trust increase. However, if there is a market crash, the donor may receive less.
Under the annuity trust there is still risk, but it can be mitigated. The donor does not have to worry about the value of the assets in the trust, only that there are enough assets to pay him. As such, the trust can take a very conservative approach to asset preservation.
There are two major benefits to a CRT that make them powerful planning tools. If the donor has grain or livestock subject to self-employment tax, donating it to the CRT essentially wipes out the self-employment tax portion. That is, payments from the CRT are not subject to self-employment tax. Another benefit is the CRT does not pay tax on the sales proceeds. That allows the trust to invest the entire amount to generate returns. That's much different than if the donor sold the assets and paid tax on the proceeds. In essence, the donor can use the money that otherwise would have been paid as tax to generate return for himself and the charities. Another potential benefit is if any of the assets have basis, the donor can get a charitable deduction for the contribution of those assets.
Why are CRTs gaining popularity? Under the new tax laws, farmers can use bonus depreciation to depreciate both new and used assets. Assets depreciated using this method, rather than Section 179, do not have the potential of recapture when donated to the CRT. In the past, use of Section 179 limited the ability to contribute equipment to a CRT due to the donor having to recognize income if the asset was fairly new. Also, higher interest rates mean higher annuity trust payments, thus more money in the pocket of the donor.
So if you don't have any heirs who want to continue the farming operations and liquidation of inventory and assets seems inevitable, take a look at charitable remainder trusts.
Editor's Note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota.
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