It is the start of another year, and the farm community continues to grow older. Succession continues to be a hot topic, and many of my clients have become proactive with estate/succession planning. But unfortunately, things happen, and even the best plans don't always work.

Last year, I had several clients dealing with an issue I rarely see. Here is the scenario: A father, who is in his 70s, plans to give the farm to his child. Before the succession plan can take place, the child passes away unexpectedly. Without the help of the child, the farmer needs to either sell the farm or downsize. The inevitable question is this: Now, what do I do?

One option is a charitable remainder trust (CRT). The farmer (donor) sets up a trust with a charity as the end beneficiary. The donor contributes assets -- typically assets that, if sold, would result in ordinary or recapture income -- to the trust. I should point out that bare land is typically not contributed to a CRT. In exchange, the trust pays the donor money for a period of between two to 20 years. After the trust receives the assets, it sells them, and because the trust is charitable, it pays no tax on the sale. The trust invests the income from the sale and makes payments to the donor as set in the agreement. After the last payment to the donor, the remaining assets in the trust go to charities of the donor's choosing.

There are two types of CRTs: unitrust and annuity trust. Under a unitrust, the donor gets paid a percentage of assets remaining in the trust. Under an annuity trust, the payments are fixed at the time of contribution and do not depend on the assets in the trust. Which is better? That all depends on your risk tolerance and desire to contribute assets in the future. A unitrust allows you to contribute additional assets after the start of the trust, which provides flexibility. The annuity trust only allows you to contribute assets at the inception of the trust. If you plan on contributing grain from multiple crop years, a unitrust is the way to go.

Why is the CRT so powerful? There are three major benefits of a CRT. First, you are using government money (i.e., the amount you would have otherwise paid in tax) to invest and get a rate of return. Second, if the donor has grain or livestock subject to self-employment tax, donating it to the CRT essentially wipes out the self-employment tax portion. That is, payments from the CRT are not subject to self-employment tax. The third benefit is that income can be spread between two to 20 years. This allows income recognition at lower tax brackets, which could save a substantial amount of tax.

As you look at estate/succession planning, CRTs should be discussed as a viable option. It's one tool to help farmers with a tax-efficient exit strategy. Although not the only option, it is simpler than spousal lifetime access trusts (SLATs) and cash balance plans.

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DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/….

Rod Mauszycki can be reached at taxman@dtn.com

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