Oklahoma Conference of the United Methodist Church

Legacy Planning Using a Farm or Ranch – Part 2


In our article published on June 5, 2015, we noted there are significant financial, tax, and estate planning advantages for families who make legacy gifts using farmland or ranchland. A great planning solution is a Charitable Remainder Unitrust, which is a tax-exempt trust. The farm or ranch family transfers appreciated property to the trust and receives an income tax deduction for the present value of the remainder interest. The property is then sold inside the trust tax free, bypassing capital gains on the sale. The Unitrust pays a fixed percentage of the assets each year to the trust beneficiaries. Upon the death of the final beneficiary, the remainder benefits the ministries designated by the family.

While the family can transfer all of the property to the Unitrust, many will find it advantageous to transfer only a portion of the property into the trust. Known as the "Sale and Unitrust," this concept allows the donor to receive an income tax deduction and lifetime income from the trust along with a lump sum distribution of cash from the portion of the property sold outside the trust.

Generally, the "sale portion" will produce capital gains tax liability. Fortunately, the deduction from the Unitrust can be used to offset all or a portion of the capital gains tax. The "Sale and Unitrust" is a popular option because it generates immediate liquidity and retirement income.

John and Susannah are ages 75 and 70. John has farmed 500 acres of wheat for the past 40 years. When they were first married, John promised Susannah that someday they would retire, sell the farm, and move to the lake. Since farming is becoming more difficult for John, Susannah convinced John that now is a good time to make good on his promise.

The farmland is valued at $1 million and their cost basis in the property is $100,000. They recognize that they have a potentially large capital gains tax liability if the property is sold. John and Susannah need both retirement income and $400,000 cash to buy their lake property. By transferring $600,000 into the Unitrust, John and Susannah will receive 5 percent of the trust’s value for both their lifetimes. In addition they will receive $400,000 cash. The income tax deduction from the Unitrust will offset the capital gains tax from the sale. John and Susannah have achieved both their financial goals and charitable goals since the remainder will be used to fund an endowment for the benefit of their church.

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

Summer is here! Visit okumf.org and find the Petree grant application. Deadline is September 15.



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