John, who is 65, and Susannah, 60, own a farm in western Oklahoma. John farms and teaches business in a nearby college. They have two children and four grandchildren, who all live in North Carolina.
John plans to teach for five more years, and then he and Susannah plan to retire in Asheville, N.C.
Recently, John and Susannah met with the Oklahoma United Methodist Foundation. Their goals are: (1) to supplement their retirement income; (2) to provide a bequest to their children; and (3) to provide a bequest to their church.
The fair market value of their farm is $1 million. If John and Susannah sell it, the capital gains tax will be over $200,000, leaving about $800,000 to meet their goals.
The couple wondered if there is a better option than selling the farm. The Foundation had answers for them. One solution would be to combine a Charitable Remainder Unitrust and an insurance trust. Under this “Unitrust and insurance trust” plan, John and Susannah would transfer their farm to the Unitrust. At the same time, they would establish an irrevocable life insurance trust (ILIT). The insured would be John and Susannah.
By transferring the farm to a Unitrust, they would receive 5 percent annually of the fair market value of the trust, avoid the capital gains tax, and also receive a charitable income tax deduction.
During the first five years of this plan, they would contribute $50,000 annually from the annual Unitrust payments to the ILIT to pay the premium on a second-to-die life insurance policy. Based on their life expectancy of 28.8 years, the ILIT would receive insurance proceeds of over $800,000. Those proceeds would be distributed to their family members as an inheritance according to the trust’s terms.
Since the ILIT is owner and beneficiary of the insurance policy, those proceeds would not be subject to income or estate tax. There is an additional provision for taking advantage of the gift tax annual exclusion.
John and Susannah would receive an income net of premiums estimated at over $1.6 million during their lifetimes, for a total of $2.4 million from the Unitrust and the insurance trust.
And their United Methodist church would receive an endowment of over $1.7 million from the remainder.
John and Susannah were very pleased with the results of the “Unitrust and insurance trust” plan. They decided to move forward with it as their legacy.
The various methods of legacy planning using a farm or ranch, discussed in this four-part series, have the common thread of benefiting families now and The United Methodist Church after their lifetimes.
Every farm or ranch family’s goals are unique. However, it is important to be aware of the options available to achieve those goals.
The Oklahoma United Methodist Foundation is a resource to assist you in exploring those options.
Please contact David Battles, CPA, at 800-259-6863 or email@example.com to learn more. There is no obligation, and inquiries are confidential.