INDIANOLA, Iowa (DTN) -- "Farmers live poor and die rich. Then what?" asked Minnesota farmer Glenn Krog, 79. Recent studies show farmland appreciation since 2000 has created new wealth in rural America, but that wealth hasn't necessarily filtered back to small towns. Many off-farm heirs are more likely to spend their inheritances in places like Chicago or Phoenix rather than where their farms are located.
Krog agrees a new approach is needed for rural development, so his estate plan assures that a portion of his farmland base will stay in local hands, with rents benefiting his hometown of Lake Benton (population 680).
Community foundations and national donor-advised funds are trying to get the word out. Farmers can gift land, cash or grain to be used to help support the local school, community center, community medical clinic, church, 4-H program -- any 501(c)(3) charity. It takes some planning, but the process of gifting to a community foundation is relatively straightforward, said Lakefield, Minnesota, attorney Patrick Castello. It's especially fitting for someone like Krog who has no children, but the strategy also works for landowners with sizable estates who want their hometowns to flourish long after they're gone.
If you gift land, you can receive income from the land until you and your surviving spouse (or other heir) die. For example, Minnesota's Southwest Initiative's first gift was 120 acres from an anonymous donor. She had been using the rental income from the farm she owned to maintain her home.
When she needed assisted living, the farm owner (who had no children) found she would need to sell nearly half of her land over time to pay for the assisted-living accommodations. Not wanting the farm to be broken apart, the owner set up a life estate with the Southwest Initiative, gifting the land with the reservation that she could use the land and its rental income for the remainder of her life.
She lived another eight years, receiving the rental income. The young farmer tenant who had come to rely on her farmland was able to remain a renter and is still the tenant on that farm, said Diana Anderson, president of the Southwest Initiative Foundation in Hutchinson, Minnesota.
When you want the foundation to receive the farm income is a decision you make. Some farmers want to advise where their donations go while they are still around. However, if the foundation does not receive any income until your death, your heirs can advise which charities would receive the farm's income. Or you can have the foundation decide where it can best be spent.
The donation process is relatively simple. Information you need to provide to make a gift of land is: (1) a copy of the deed; (2) a legal description of the parcel of land you want to gift; (3) a copy of the lease; and (4) a recent appraisal.
If you or your attorney wants to dig more deeply into community foundations and donor-advised funds, Castello's website has a detailed explanation: http://www.lawofficelawoffice.com/…
The American Endowment Foundation (AEF) also has an excellent website at http://www.aefonline.org
A national foundation, such as AEF, is better suited for people who want a broader geographic approach to their charitable gifts. "We have some families who have children across the U.S. who want to designate funds to local charities in different areas. Other donors have national charitable organizations they want to support," explained Laura Malone, development vice president for American Endowment Foundation. After receiving your completed application, the AEF can set up your donor-advised fund in a day.
Tax benefits to either a community or national foundation include: (1) a charitable deduction on your income tax; (2) no capital gains tax on contributions of appreciated assets, even though you use fair market value as your contribution; (3) any income or increase in value within the foundation is not subject to tax; and (4) it removes the asset from your estate to reduce your estate subject to state or federal estate taxes.
Four states -- Iowa, North Dakota, Montana and Kentucky -- offer additional state tax incentives for gifts to endowment foundations.
Fees vary, but AEF's annual fees are 0.7% for the first $500,000 of your fund's balance and 0.35% for the next $500,000 of your fund's balance. It requires a $10,000 minimum contribution. Also, there can be additional investment management annual fees ranging from just under 1% to 2%-3% depending on the administration and management of the donor-advised fund.
"Life is good in small-town America," said Krog who donated 320 acres to his community foundation. "We need 'capital retention' and I am thankful for area foundations."
EDITOR'S NOTE: DTN's ongoing Senior Partners series examines the financial, legal and emotional hurdles farmers face as they transition farm ownership from the senior to junior partners. For related DTN articles on donor-advised funds and community foundations go to DTN/The Progressive Farmer's In-Depth site at http://www.dtn.com/… and see "Share Your Good Fortune," March 27, 2014; "Give and You Shall Receive, " Feb. 11, 2013; and "Landowners Share the Wealth," Oct. 20, 2011.
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