By Charles Day and Paul Tozzi, J.D.
For people in the agricultural community who have built up valuable equity in productive assets, such as a vineyard owner with a low cost basis, tax considerations are particularly important. There are a number of strategies that your tax professional or attorney could recommend. One strategy that may work well, with or without an estate plan and whether or not you are considering a retirement, is a charitable remainder trust, or CRT.
Frequently, a CRT is funded using highly appreciated assets such as real estate or stock. The acting trustee then sells the assets tax-free and invests the funds to provide regular cash-flow payments to the beneficiaries for the term of the CRT.
Donating part of the crop
A potential option for funding a CRT is the use of crops. In a growing season, a farmer may use a portion of the crops to cover expenses. The balance or surplus is then profit and may be subject to tax. In this case, once the crops have been harvested and the costs have been recovered, the crops are tangible personal property with little or no cost basis, making them subject to ordinary income taxes as well as self-employment taxes. This is a situation where a CRT can have tremendous tax considerations for farmers.
For example, a vineyard owner could donate $1 million worth of crops to the CRT. The trustee would sell the grapes tax-free, because of the tax-exempt nature of the CRT. The trustee then invests the full $1 million and provides regular cash-flow payments to the farmer. Without the CRT, a substantial portion of the $1 million would be used to pay income taxes and self-employment taxes, leaving much less for investing and future cash flow.
The CRT concept, if structured properly, could also benefit a vineyard owner looking to sell highly appreciated assets. For example, a vineyard owner with a large equity position may be considering a sale of the vineyard to a winery buyer. In this case, the vineyard owner should structure the sale of the current-year crop separate from the underlying real property. The current-year crop could be donated to the CRT, then the crop is sold by the trustee to the vineyard buyer in a separate transaction, eliminating that portion of the sale from the capital gain.
Of course, it is important to remember that a CRT is highly complex from both a legal and financial perspective. To achieve the tax savings discussed in this article, it is essential that the CRT is created and the entire transaction is structured by an attorney with substantial experience in this area. In addition, your tax professional is also a vital part of this team.
Additionally, when considering a trust, there is always a need to identify a trustee. In the case of the CRT example above, the Wealth Management division at Rabobank or another institution could be engaged in this capacity. The trustee would then be bound by the terms of the CRT. Rabobank’s knowledge and experience in the agricultural community would make it a strong candidate to act as trustee.
There are many tax consideration options available to business owners today. Having a sound legal, tax and trustee team is vital to the future strength of your business.
Charles Day is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, NA. Article contributor Paul J. Tozzi, J.D., is vice president and senior trust officer in Rabobank’s Wealth Management division.
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