One of the most common situations facing retiring farmers is a looming income tax burden. From year to year, farmers are buying seed, fertilizer, and other inputs for next year’s operations while also deducting machinery and equipment. In the last year of business, the farmer often has assets with little tax basis and no offsetting input and business expenses to reduce taxable income. Charitable remainder trusts can offer relief for farm owners in this situation.
A charitable remainder trust is an innovative way to eliminate the tax hit by spreading income out over a number of years, thereby decreasing the total tax burden while benefiting the farmer’s church, local library, or other favorite charity. With proper planning, the total after-tax benefit of a charitable remainder trust will be greater than just selling and paying the tax.
The way it works is the farmer transfers crops, inventory, livestock, or farm equipment to the trustee of the trust. The trustee then sells the assets. Since it is a charitable trust, neither the farmer nor the trust incur a capital gain. The proceeds can be used to invest in stocks, bonds, and mutual funds. The farmer then receives an annual income stream from the trust either for life or for a fixed number of years. When the trust is terminated, the remaining assets are distributed to the farmer’s chosen non-profit organization. In order to qualify as a charitable remainder trust, at least 10% of the contributed assets must be projected to eventually pass to the charity.
By using this arrangement the farmer has no gains from the sale of the farm assets and the income is spread out over a number of years, potentially at a lower tax rate. Charitable remainder trusts can even be structured to so that the income is deferred for a number of years or designed to benefit the next generation. There are a number of ways to customize charitable remainder trusts for each farmer’s situation.
Any farmer with highly depreciated assets looking at a retiring should discuss charitable remainder trusts with their tax or legal adviser.