If you are charitably inclined, thinking about selling your crops, livestock, equipment or retiring from farming altogether and interested in deferring the income tax on the sale of those assets you should be considering a charitable remainder trust (CRT).
Here’s how it works. First, work with an advisor to create a CRT and contribute crops, livestock or equipment to it. Then the CRT sells the contributed asset and the person creating the CRT (the donor) or somebody else designated by the donor receives an annuity payment from it for a period of time. Since a CRT is exempt from paying income tax it will pay no income tax at the time of the sale.
In other words, a CRT is treated like a charity for income tax purposes. The individual receiving annuity payments from the CRT only pays income tax on the annuity payment in the year the annuity is paid. When the annuity payment end, whatever assets remain in the CRT are paid to a charity or charities selected by the donor. The minimum amount that must pass to charity is at least 10% of the value of the asset contributed to the CRT.
Normally, a contribution to a CRT would also entitle the donor to a charitable income tax deduction based on a capital asset’s fair market value at the time of the contribution (for example if land was contributed to the CRT). However, for an ordinary income type asset, the charitable deduction is limited to the donor’s adjusted tax basis. If the donor has taken advantage of depreciating the contributed asset, the tax basis could be nothing at the time the asset is contributed to the CRT.
If that is the case, the donor would not receive a charitable income tax deduction. But any expenses incurred prior to the contribution to the CRT would be deductible by the donor and the income tax on the sale is spread over a number of years versus being all paid in the year the asset is sold. If you are getting out of the farming business, the charitable remainder trust (CRT) may be a great way to convert crops, livestock or machinery into a retirement fund.
For more information, reach out to me at doug.mitchell@kcoe.com.
