Gift Opportunities for Farmers and Ranchers

Farmers and ranchers may have special opportunities to assist worthwhile causes.  Here is just one example:

A farmer proposed to fund a charitable remainder unitrust with beans and slaughter cattle he had raised in his business.  The trust would pay income to the farmer and his wife for life.  The farmer expected no charitable deduction from the arrangement, due to some special tax rules, but he was hoping for:

• avoidance or deferral of income tax when the beans and cows were sold from the trust;
  
• avoidance of self-employment tax on proceeds from the sale.

The farmer's attorney wrote to the IRS and asked for a private ruling.  The IRS ruled favorably on all of the donor's questions, stating that the trust would qualify and would not have taxable income when the trustee sold the farm products.

What did the farmer gain from this gift arrangement?  First of all, he had the satisfaction of helping a worthwhile organization at some point in the future (when the trust ends, a charity will receive whatever principal is left in the trust). From a financial standpoint, he and his wife will receive lifetime income paid from proceeds of the sale of the cattle and beans – without any loss from taxes upon the sale. 

Ordinarily, the farmer would have paid income tax on his profits from selling the farm products.  Because the trust is tax exempt, however, nothing is lost to taxes.  What's more, the farmer would have owed self-employment tax if he sold the items himself (15.3% at the time).  All told, 40% or more of the sale proceeds could have gone to the tax collector, if he had made the sale himself.  The only tax he will owe will be on his quarterly income payments from the trust.

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