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Charitable remainder unitrust for farm crops: A possible tax savings device
Posted in Tax and Finance

In a farm operation, like any business venture, business transactions have tax consequences. Farmers engaged in the production of crops, such as corn and soybeans, are well aware that income in excess of expenses represents taxable income. While this same amount represents profit for the farmer, it can also create a large tax burden. This is especially true for retiring farmers, who may have harvested crops or livestock to sell, but have no offsetting expenses. Additionally, in good years, surplus crops in excess of expenses may impose a large tax burden when sold.

Help in decreasing this tax burden now comes in a new and unusual form, a charitable remainder unitrust (CRUT). You can establish a CRUT, receive a stream of income during your lifetime, and then leave the income to your spouse for life. The payment is based on a fixed percentage of the CRUT’s assets and must be less than 50% but more than 5% of the net fair market value of the CRUT’s assets as valued annually. At the end of its term, the remaining amount in the CRUT must pass to one or more specific charities of your choosing. A charitable deduction on your income, gift and/or estate tax return might be available to you when you establish the CRUT.

To establish a CRUT, some type of tangible property can be transferred to it. Harvested crops, such as corn, soybeans and wheat, qualify and can be transferred to the trustee of the CRUT. The transfer must be properly documented. Once the trustee receives the harvested crops, the trustee can then sell those crops. After the sale, the trustee holds and invests the proceeds to provide for the payout to you and your spouse and the later distribution to a qualified charity.

The benefit of a CRUT to the farmer is that taxes are not payable upon the transfer and sale of the harvested crops. Instead, the farmer is taxed annually on the CRUT payments received. In some cases, this results in an after-tax value of the payments exceeding the after-tax value of the outright sale. (While a charitable income tax deduction is possible when the CRUT is created, it is unlikely in this case since the farmer normally does not have a basis in the harvested crops.)

The use of a CRUT may provide farmers with a unique tax saving device. It is not just crops that can be transferred. Certain livestock, machinery and other farm assets may qualify as well. While certainly a CRUT is not for every situation, it could be very beneficial for retiring farmers or farmers selling surplus crops. However, before deciding to proceed, a farmer should contact a specialist who practices regularly in the CRUT area. Each situation is unique. In addition, there are many tax regulations and requirements that must be followed when establishing a CRUT and transferring property to it.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

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