Cleaning Up Loose Ends — A Tale of Two Farmers – Henry & Associates

Cleaning Up Loose Ends — a Tale of Two Farmers

 

Jeannie Evans inherited farm ground from her father, and she was exceptionally proud of its status as a centennial farm, one that had been under the same family’s management for over 100 years.  With no heirs other than a few nieces and nephews, Ms. Evans decided to leave her farm to the local university.  Not that giving farmland is a bad idea, but when Jeannie invited the alumni and development officers from the university out to see the farm, they indicated that it was foundation policy was to sell farmland if it did not fit into their management scheme.  After the development officers headed down the road to their next appointment, Ms. Evans hurried over to her lawyer’s office to redraft her will.  The new will’s provisions? 

§   The university cannot sell the land, even though the farm is too far from the research unit on the campus to be practical, and the acreage is too small to devote resources or staff to manage it.

§   The university has to continue using Jeannie’s long time tenant farmer and give him preferential lease rates, although the university had a professional farm manager and staff experienced in maximizing production. 

§   She leaves her nieces and nephews her portfolio of government savings bonds.  Unfortunately, the problem with inheriting bonds is that all of the accrued interest usually has an income tax liability that passes to the heirs.

 

In this case, Ms. Evans would be more tax efficient in her tax planning if she leaves the farmland, which steps up in basis at death, to her family and the taxable bonds to the tax-exempt university, which prefers cash for scholarships and endowment.  This solution allows her heirs the option of selling the farm without a capital gains tax, and the university receives the cash from the bonds without paying tax on what would otherwise be an IRD (income in respect of a decedent) asset.  Even with the gift in place and booked as a bequest, the university foundation should reconsider this gift.  With Jeannie’s new provisions, the university will be better off disclaiming a gift that has so many restrictions and avoid the grief of working with an uncooperative tenant farmer and an underperforming real estate asset.

 

The Right Stuff

Dave Janssen owns and operates an irrigated corn, soybean and wheat farm, and like many farmers, he lives poor, but is quite likely to die rich.  Dave is active on the town council, serves on the local school board, and would like to make a significant gift to the new school foundation.  Not comfortable with making a sizeable gift while he is still actively farming, a bequest in Dave’s estate plan seems to be the best solution.  In Dave’s role as a communitarian, this bequest would endow scholarships for students planning to return to the community as a teacher, health care provider or serve in a public service capacity. 

 

After reviewing the Janssen balance sheet and cash flow projections, the choice comes down to a gift of farmland or a gift of equipment and grain.  Whichmakes more sense?  In this case, the grain would be an IRD asset taxed at 35% in his estate, and the depreciated equipment is not something his non-farming heirs would be able to use or easily market.  His heirs would be better off if they inherited the land that steps up in basis at death, and then they can choose whether to sell it tax-free or operate it as a leased farm until other opportunities present themselves.  The tax-exempt foundation can take possession of the grain stored in the bins and have it sold through the local co-op elevator at market value without paying any income tax, and the equipment auctioned at a farm sale with the proceeds reinvested in the scholarship fund.

 

Achieve tax efficiency in charitable bequests more easily by inserting language in the will that specifies how to make gifts, and where to go in the estate to find the best assets.  Consider using something like the following as a guide.  “I instruct that all charitable gifts, bequests, and devises should be made, to the extent possible, from assets that constitute income in respect of a decedent, as that term is defined in the Internal Revenue Code.”

 

©2003 — Vaughn W. Henry