Legacy Planning Using a Farm or Ranch – Part 3


John and Susannah, ages 75 and 70, are like many Oklahoma farm and ranch owners. They have lived in their home for many years. The time has come, they have decided, to sell the farm, but they really want to continue living in their home.

A great solution is provided for them through legacy planning with the Oklahoma United Methodist Foundation. It benefits them right now and will benefit the United Methodist church they love after their lifetimes.

The value of John and Susannah’s home and the surrounding property is $200,000. If they deed their property to the Foundation and retain a life estate, they will receive a charitable income tax deduction in the amount of $112,950. This charitable deduction then could be used to offset the capital gains tax from the sale of their farm.

The couple can continue to live in their home. Then, after their lifetimes, the proceeds from the sale of the property will be used to establish an endowment that will benefit their church.

This solution for John and Susannah also could apply to farm and ranch property that you own. Like the couple, you may be interested in this opportunity to continue living in your home even after the rest of your property is sold.

When property is sold, one way to offset the capital gains liability upon the sale is to make a charitable gift that will generate an income tax deduction. A charitable life estate permits a farm or ranch family to remain in the home and receive an income tax deduction that could offset other income taxes.

With a life estate, the family deeds a remainder interest in the home and surrounding land to the Foundation and reserves the use of the property for their lifetime(s). By setting up the life estate, the family is allowed a charitable deduction for the current value of the remainder interest in the property. For a life estate to be deductible, the property must be (1) a personal residence or (2) farm or ranch property, i.e. land used for agricultural production.

When a life estate is established, the life estate holder still is responsible for maintenance, insurance, and taxes. An agreement is executed with the Foundation, which clarifies that the holder of the life estate is responsible for maintaining and caring for the property during their lifetime in the same manner as they did before establishing the life estate.

A family may be concerned that creation of a life estate will deny the life estate holder flexibility in the future if circumstances change. Although a life estate is an irrevocable transfer, it is a valuable property interest that gives the life estate holder several options.

• First, the holder and the remainder charity could jointly sell the property and receive their respective shares of the sale proceeds. Depending on the value of the property and the life estate holder’s age, a joint sale could produce significant sales proceeds for the holder.

• Second, the holder could gift the life estate to the remainder charity for an additional charitable income deduction.

• Third, the holder could transfer the life estate to fund a charitable gift annuity or a charitable remainder trust in exchange for the value of the remaining life estate.

Are you interested in learning more about a life estate? If so, please contact David Battles, CPA, at 800-259-6863 or dbattles@okumf.org. There is no obligation and all inquiries are confidential.


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