The charitable remainder trust: A valuable financial tool for cattle producers

How it works

With the help of an attorney, you establish a CRT and transfer your assets (e.g., land, livestock, equipment) to the trust. The trustee of the trust, which can be you or an organization you assign as trustee, sells the assets. Since a CRT is a tax-exempt entity, there are no taxes due upon the sale. The cash from the sale is then invested within the trust in a manner designed to provide a lifetime income for you, the donor.

Chris Nolt

Two sets of beneficiaries are established in the CRT: the income beneficiary and the remainder beneficiary. The income beneficiary, which is generally the donor and his or her spouse, receive income from the CRT for their lifetimes or for a term of years. The remainder beneficiary is the charity or charities that will receive the principal, or “remainder” of the trust after the income beneficiaries die.

Benefits of a CRT

Besides deferring taxes on the sale of ranch property, additional benefits of a CRT include:

1. Generate more income for retirement

Because the full proceeds from a sale of ranch assets are able to be invested for retirement versus the after-tax proceeds from a sale, more income can be generated for retirement.

2. Potentially reduces estate taxes

Assets in a CRT are removed from the taxable estate of the donor, potentially reducing future estate taxes for their children.

3. May generate an immediate federal income tax deduction

In addition to bypassing capital gain taxes on the sale of capital assets such as land or raised cattle, donating assets to a CRT will provide the donors with a charitable deduction which can be used to offset income taxes the year the gift is made. Unused deduction may be carried forward up to five years.

4. Some states, such as Montana, offer a state income tax credit on gifts to a CRT.

5. Provides a vehicle to diversify investment assets

Unlike a 1031 exchange, the money in a CRT can be invested in a diversified stock and bond market portfolio.

6. Help support your favorite charity or charities and leave behind a lasting legacy

For many people, the most meaningful benefit a CRT offers is the ability to benefit charities near and dear to their heart and leave a lasting legacy – and to do so in a tax-efficient manner.

CRUT vs. CRAT

There are two types of CRTs; the charitable remainder unitrust (CRUT) and the charitable remainder annuity trust (CRAT).

1. Charitable remainder unitrust

The charitable remainder unitrust pays a fixed percentage of the trust’s value each year to the donor or to others named. The donor selects the percentage at the time the trust is created. The percentage must be at least 5% and not more than 50% of the fair market value of trust assets, as revalued annually. A typical payout is around 7%.

2. Charitable remainder annuity trust

A charitable remainder annuity trust pays a fixed dollar amount each year to the beneficiaries. The trust continues for the life of all income recipients or for a specified term of years not to exceed 20. Since charitable remainder annuity trusts provide for only a fixed amount being paid out each year, this type of trust cannot take advantage of future growth or higher earnings of the assets in the trust. However, this trust does offer the security of consistent income, even in a flat market.

Sale of land and cows

Proceeds from the sale of land and raised cattle are capital assets and incur capital gain tax and the Medicare surtax. The same cows sold in a CRT may avoid or defer these taxes otherwise due on the sale. This allows the full proceeds from the sale to be invested inside the CRT to generate lifetime income for the donors. Contribution of land and cows generate a charitable deduction based on the donor’s basis in the land and cattle.

Sale of calves and crops

Proceeds from the sale of calves and crops are treated as ordinary income and incur self-employment tax (Social Security tax and Medicare tax). The same calves and crops sold in a CRT may avoid or defer these taxes otherwise due on the sale. This allows the full proceeds from the sale of the calves and crops to be invested inside the CRT and generate lifetime income for the donors. Contribution of calves and crops to a CRT does not generate a charitable income tax deduction for the donor.

Sale of equipment

The recapture of depreciation on the sale of machinery, equipment or other depreciated property is treated as ordinary income. These same assets sold through a CRT can avoid or defer this tax and the Medicare surtax and the full proceeds invested to generate lifetime income for the donors. Contribution of equipment generates a charitable deduction based on the donor’s basis in the equipment.

Chris Nolt is the owner of Solid Rock Wealth Management Inc. and Solid Rock Realty Advisors LLC, sister companies dedicated to working with families selling a farm or ranch and transitioning into retirement. Chris is also the author of the book Financial Strategies for Selling a Farm or Ranch, which can be purchased on Amazon.com. For more information, visit Solid Rock Wealth Management and Solid Rrock Realty Advisors or call (406) 582-1264.