The value of farmland has escalated tremendously over the last few years so if the farmland is sold there will be a very high gain in value that is subject to capital gains taxes.
One method of reducing this tax dilemma is to sell the farm through a charitable remainder trust. This type of planning makes sense if one of your goals includes supporting your favorite ministries (such as Lutherans For Life).
For example: Herb and Helen own a 160 acre farm and an 80 acre farm. They are both 75 years old and none of their three children have stayed home to help manage the farm. They have all married now and live with their families in cities far away from the farm. Herb and Helen rent both of their farms on a cash basis to a neighboring farmer. Their farm tenant has expressed an interest in buying the 80 acre farm next year.
Herb and Helen are considering this but are concerned about the large capital gains tax that would be due if they sell the farm for cash. When I met with them in their home I discussed some of the details of their situation so that I could share with them a charitable giving plan they may want to consider.
They had purchased the 80 acre farm 20 years ago for $1,000 an acre for a total cost basis of $80,000. They believe the tenant would be willing to pay $10,000 an acre for a sale price of $800,000. The total gain on the sale would be $720,000. A sale of this size could put them in a 20 percent capital gains tax bracket. The potential capital gains tax on the sale would be $720,000 x 20 percent = $144,000. This is quite concerning for them as the tax would be more than the original sale price for the farm!
At our second appointment I shared another idea—a charitable remainder trust. Instead of selling the farm themselves, Herb and Helen would deed the farm to a charitable remainder trust managed by a trustee (which could be a national Lutheran church body foundation or a bank trust department).
The trustee of the charitable trust would sell the farm to the tenant instead of Herb and Helen selling it themselves. Because the trust will ultimately benefit qualified charities there would be no capital gains taxes due on the sale proceeds. Herb and Helen would receive a lifetime income of five percent of the trust investment assets. This amount would vary each year depending on the value of the trust assets. If the trust assets were $800,000 and the payout rate of the trust was five percent the first year income from the trust would be $40,000. The cash rent for the 80 acre farm was $24,000 a year so the trust income would be more than they had been receiving. The income stream from the trust would continue for both of their lives and then for 20 years to their children after the second one of them dies. At the end of the income stream the trust principal would be divided among their favorite ministries—including Lutherans For Life. Herb and Helen liked this concept and I assisted them with all of the details of putting the plan in place.
If you would like more information about a charitable remainder trust, please contact me at email@example.com or 515.490.7371.
Jim Schroeder is LFL’s Christian estate planning counselor.