Yes, a charitable remainder trust (CRT) can absolutely own income-producing farmland, and it can be a surprisingly effective estate planning tool for those with significant land holdings and philanthropic goals. CRTs are irrevocable trusts that provide an income stream to the grantor (the person creating the trust) for a specified period or for life, with the remainder going to a designated charity upon the grantor’s death. This structure allows individuals to receive immediate tax benefits – an income tax deduction for the present value of the charitable remainder – while still retaining income from the asset. Approximately 60% of farmland is expected to change hands over the next 20 years, presenting opportunities for estate planning involving these assets, and CRTs can be a key element of that strategy.
What are the tax benefits of using a CRT for farmland?
The tax advantages are substantial. When farmland is transferred to a CRT, the grantor receives an immediate income tax deduction for the present value of the remainder interest that will eventually go to the chosen charity. This deduction is based on IRS tables that factor in the age of the beneficiary (often the grantor themselves), the payout rate, and the value of the farmland. Crucially, the sale of appreciated farmland *into* the CRT avoids capital gains taxes that would be due if the land were sold directly. The CRT itself is typically exempt from income tax, meaning the income generated by the farmland – rent or crop sales – isn’t subject to annual income taxation within the trust, allowing for greater long-term growth. According to the National Philanthropic Trust, charitable giving received through planned gifts like CRTs has increased by over 70% in the last decade, demonstrating their growing popularity.
How does a CRT work with ongoing farm operations?
A CRT doesn’t necessarily mean the end of farming. The trust can either lease the farmland to a third-party farmer, or, with careful planning, the grantor (or family members) can continue to operate the farm themselves, paying reasonable rent to the trust. This allows the family to maintain their farming legacy while still benefiting from the tax advantages of the CRT. The rental income is then distributed to the grantor as the designated income beneficiary, according to the terms of the trust. It’s vital that any arrangement with family members operating the farm is structured as a genuine landlord-tenant relationship with fair market rent being paid, to avoid IRS scrutiny. The average annual farmland rental rate in the United States is around $136 per acre, but this varies significantly by state and region.
What went wrong for the Henderson family and their farm?
Old Man Henderson had spent his life building a thriving apple orchard. He envisioned passing it down through generations, but hadn’t updated his estate plan in decades. When he passed away, the farm was caught in probate, a costly and time-consuming process. His children squabbled over its future, and the estate taxes, combined with the lack of liquidity, forced them to sell off large portions of the orchard to settle the debts. The remaining land sat fallow for years, a sad testament to a lack of planning. If Old Man Henderson had established a CRT earlier, he could have avoided probate, reduced estate taxes significantly, and ensured the continuation of the farm, while simultaneously supporting his favorite local charities. It was a painful lesson for the family, a missed opportunity to preserve their legacy and give back to the community.
How did the Millers successfully utilize a CRT for their farmland?
The Millers, faced with a similar situation, took a different approach. They owned 300 acres of prime corn and soybean farmland, and wanted to ensure its preservation while providing for their children and supporting a local agricultural education program. Working with Ted Cook, an Estate Planning Attorney in San Diego, they established a charitable remainder trust. The farmland was transferred into the CRT, providing them with an immediate income tax deduction and avoiding capital gains taxes. They then leased the land back to their son, who continued to operate the farm, paying fair market rent to the trust. The rental income provided a comfortable supplement to their retirement income, and they knew that upon their passing, the remaining value of the CRT would go to the agricultural education program, ensuring the continuation of a vital resource for future generations. It was a win-win scenario, preserving their legacy, supporting a worthy cause, and providing for their family’s financial security.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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