Creative Strategies to use Agricultural Assets for Retirement Income and Charitable Giving
Oct. 9, 2018
By: Kristi Knous, CAP®, MPA, FCEP
President, Community Foundation of Greater Des Moines
For many farmers, their land, equipment and livelihood have been the focus of their energy, sweat and resources for most of their lives. As they near retirement, there are a lot of decisions to make. How can they support their retirement income needs, support their family and leave something to the community or causes they care about? How can they ensure a steady stream of income during their lifetime and still achieve their giving goals? Trust departments provide the unique opportunity to create a solution through administration of a Charitable Remainder Trust (CRT). A CRT provides a unique opportunity for a donor to retain lifetime income from assets they currently own while obtaining a current income tax deduction for the remainder interest that will eventually pass to charity. It also provides a unique opportunity for clients with agricultural assets.
A farmer typically owns large pieces of equipment along with their farmland. Some of their equipment can be worth hundreds of thousands of dollars and may be fully depreciated. This situation provides an advantageous scenario to use a CRT. For example, let’s say Joe and Jill Farmer, age 68 and 66, have just completed their last harvest before retiring. Their children do not intend to take over their farming operation and the couple is preparing to sell their equipment.
Joe and Jill had previously fully depreciated the machinery so their tax basis in the equipment is zero. As a result, they learned that if they sold the machinery they would have to pay a lump sum on the proceeds from the sale at the ordinary income tax rate, leaving them less to invest for income in retirement. The couple also has deep roots in their community with interest in leaving a legacy after their lifetimes. Given this, their local banker encourages the couple to consider a charitable remainder unitrust (CRUT).
The couple gifts the farm equipment to the CRUT with their local bank serving as the trustee. The machinery is sold at auction, no tax is paid and the sale proceeds are invested through the CRUT. Joe and Jill decide to receive 6% of the trust balance annually for the remainder of their lifetime. The tax payments are spread out over the term of the CRUT and Joe and Jill will be in a lower tax bracket in retirement.
As the couple establishes the CRUT, they also partner with their local community foundation to ensure the remainder is used to meet their giving goals after their lifetimes. The Community Foundation establishes a charitable giving fund in partnership with the couple to document how the funds will be distributed. Joe and Jill decide to give 25% to their local church, 25% to a nonprofit they have given to for years and 25% to the local school district their children attended. They decide to designate the remaining 25% to establish the Joe and Jill Farmer Fund at the Community Foundation as a permanent endowment their children and grandchildren can give from for generations to come.
This flexible and personal approach offers unique opportunities for your clients to meet financial and charitable goals. At the Community Foundation, we are proud to serve as the host foundation for 31 affiliate community foundations across our state. As you seek to present your clients with solutions to maximize their resources; it would be our privilege to work alongside you to connect you with local giving opportunities. Get connected to learn more at 515-883-2626.