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.
Use a CRT for Retirement Equipment Sales
Dec 20, 2011
We had a reader ask the following question:
"Is there any way to reinvest money from the sale of equipment(retirement) rather than pay ordinary income tax on it?"
Most farmers when they retire have a large amount of income from selling the final crop and their equipment and many times very little expenses to offset it with. This results in a large amount income tax being owed, thus reducing the farmer's after tax cash flow.
One method that we use to reduce and spread out this tax burden is the use of a charitable remainder trust (CRT). The farmer will contribute their equipment and unsold grain inventory to the CRT. Based upon the term of the trust, the farmer will get a tax deduction for this transfer. The CRT will the sell the equipment and grain and owe no taxes on the sale. Rather, this gain is accumulated and as the CRT makes payments to the farmer, they are taxed on the distributions when they receive the payments. These distributions can be fixed at a certain annual amount or a percentage of the trust value each year.
In order to be a valid CRT, at least 10% of the assets transferred into the trust must be expected to go to charity at the end of the trust term. A CRT is a great method to defer the tax for several years on the sale of farm equipment and final grain sales.
If this is something you are interested in, you need to review it with your tax advisor since there several calculations that must be made.
One example is as follows:
Farmer is retiring and has $1 million of farm equipment and $750,000 of final grain inventory to sell. He does not need the cash immediately and wishes to use this as retirement income. If the farmer sold the equipment and inventory for cash in his name, the total taxed owed would be about $750,000 assuming a top federal and state tax bracket. He would have $1 million left over to reinvest at lets say 4% a year or $40,000.
By putting these assets in the CRT, it could sell the equipment and grain and pay no tax. The CRT would have $1,750,000 earning 4% or $70,000 per year. The CRT would then distribute this income and some principal out the farmer each year and it is likely that the farmer would be in a lower tax bracket on that income.