The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Make Sure the Trust Owns the Property!
May 09, 2012
We received the following questions from a reader regarding using a charitable remainder trust:
I am retiring from farming and I have equipment valued at 500,000 ,all of which is fully depreciated. I would like to give this equipment to a charitable trust to get 50,000 over the next 9 years (I think they keep 10%) . Do I give title to the equipment to the trust or sell the equipment in my name and give the trust the money? Or do I need to have the buyer make the check out to the trust to avoid the income tax? Also if I want to give the trust 10,000 bushels of soybeans ($150,000) and have the trust give it back to me over 9 years, do I sell the soybeans in the trust name or my name and give them the cash?
We have had some discussions on charitable remainder trusts (CRT) previously, but a brief recap is in order. A retiring farmer can transfer fully depreciated equipment or unsold crop with no tax basis to a CRT. The CRT can sell the assets, pay no tax, invest the proceeds and then provide an annual annuity to the farmer as outlined in this question. The farmer will pay tax on the income as it is received and it is not subject to self-employment taxes.
To answer the farmer's questions, he must transfer the equipment and the crop to the trust and then have the trust sell the assets. If he sells for cash, he will recognize all of the gain on the sale and then get a small charitable dedution on the transfer to the trust. This defeats the purpose of using a CRT.
To make the transfer, he should create a bill of sale showing the transfer from him to the trust. If the grain is stored at an elevator or coop, he needs to make sure that the business creates a new account for the trust and then transfer the grain to the trust account before selling.
Also, make sure to NOT have a pre-arranged sale of the assets already in writing before the transfer. If this happens, technically the farmer is required to report the income in most cases.