CGNA: Chapter 5 - Agricultural Assets, Advanced - Part 2 of 2

CGNA: Chapter 5 - Agricultural Assets, Advanced - Part 2 of 2

Article posted in General on 9 May 2018| comments
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This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

Timber Gifts

Gifts of timber or forest land generally are even more complex than mineral rights. They combine the long term outlook of oil and gas with the growth and harvesting of agriculture. Generally speaking, the older the donated stand is, the more valuable it will be. This is because older trees are larger, and an older stand will have a higher proportion of older trees.19 However, long term forest management and expertise is required. Relevant factors include whether the land has been properly thinned, harvesting and transport, and logging negotiation and monitoring.20

Of course, if the owner harvests the timber and then donates it, many of these issues will already have been handled. In that instance, it will be more like other forms of donated tangible property. However, natural hazards such as fire should be considered in all cases.21

Charities should also proceed with caution if the donor wishes to receive an income stream in exchange for the donated timber or forest land. The assets will need to be sold to meet the payment obligations of the planned giving vehicle, meaning that there can be significant hurdles for a charity trying to convert the gift into cash. For this reason, annuity obligations in particular, such as charitable gift annuities or charitable remainder annuity trusts, are ill-suited to this asset type.22 Conservation easements are well-suited to forest land in some circumstances, so charities and donors should consider whether the forest land may be a good candidate for such treatment.23

Deferred Gifts

As explained above, bequests in a will or revocable living trust are the most popular form of planned gift. These gifts are popular since the donor may usually revoke them. Crops, livestock, and equipment can be specifically bequeathed to a charity by reference and description. Of course, prior to acceptance upon the death of the donor, the charity must conduct due diligence to assure the asset is appropriate to accept.

Interestingly, the estate tax charitable deduction is not subject to the reduction rules. Therefore regulations value a testamentary bequest of tangible personal property or inventory at its fair market value without regard to charity's use of the property.24

Life Income Plans

Crops and livestock can be donated to a charitable remainder trust.25 In Private Letter Ruling 9413020, a farmer donated beans and slaughter cattle to a charitable remainder trust. The Service held that the charitable deduction valuation was limited to the lesser of fair market value or cost basis pursuant to IRC Section 170(e)(1). In this case, that amount was zero, because the farmer had earlier deducted the costs of raising the cattle and crops as a business expense under IRC Section 162. Even though the IRS ruled for a reduced charitable deduction, the donor avoided or deferred income taxation when the beans and cows were sold from the trust. The trust would not produce taxable income for the beneficiaries when the trustee sold the donated farm assets. Rather, only as the trust made payments would beneficiaries owe income tax. In addition, the donor avoids self-employment tax on proceeds from the sale.

Livestock placed in a charitable remainder unitrust are sometimes referred to as “rawhide trusts.”26 The IRS treats these agricultural assets as tangible personal property, meaning the assets get ordinary income treatment (since they are usually business inventory for the farmer). Transfer of the livestock into trust results in a deduction for cost of goods sold once the trust sells them. Since farmers often have a low adjusted basis in these assets, the charitable income tax deduction is frequently minimal. The real benefit is bypassing the taxable income which the assets would otherwise create on sale. An important consideration for all parties is that the trust must not violate UBTI rules by fattening the livestock to increase their value (this would be an active, unrelated business endeavor).27 Instead, the trustee should feed the livestock a “maintenance” diet.

If crops, livestock or equipment is donated for a charitable gift annuity, regulations also limit the deduction to the lesser of fair market value or cost basis. Again, the donor must take into account whether or not he or she had earlier deducted the costs of raising the cattle and crops as a business expense under IRC Section 162.28 Regardless of the reduced charitable deduction, farmers may like the fixed payment opportunity of the gift annuity at a high rate based on age, as well as the avoidance of self-employment tax on the charity’s subsequent sale of the donated assets.

Agricultural Assets Additional Resources

Below are further details on gifts of agricultural assets. Agricultural asset topics are based on Phil Purcell’s “Gifts of Agricultural Assets.” For quick take-aways on gifts of real estate, see Agricultural Assets Quick Take-Aways. For a review based on that article, see Agricultural Assets Intermediate. For an in-depth examination adapted and excerpted from the article, see Agricultural Assets Advanced. For further details, see Agricultural Assets Additional Resources.

For a discussion of factors farmland owners might consider, see McBride, E. (April 7, 1999), “Accepting and Retaining Gifts of Farmland,” Planned Giving Design Center, http://www.pgdc.com/pgdc/accepting-and-retaining-gifts-farmland.

For a discussion of gifts of grain specifically, see Locher, J. (April 21, 2011), “Increasing Charitable Yields with Bushel Gifts,” farmdoc daily, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, http://farmdocdaily.illinois.edu/2011/04/increasing-charitable-yields-w.... and Hoff, G. (October 5, 2011), “Charitable Contributions of Grain,” farmdoc daily, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, http://farmdocdaily.illinois.edu/2011/10/charitable-contributions-of-gr-1.html.

For examples and an overview of the effects of various gift transactions, see Patrick, G.F. (December 2011), “Income Tax Management for Farmers in 2011,” Purdue Univ. pp. 21 – 23, http://www.agecon.purdue.edu/extension/programs/tax/2011_INCOME_TAX%20MANAGEMENT_FOR_FARMERS.pdf.

For an examination of possible charitable avenues for retiring ranchers and farmers, see Hays, J. (October 29, 2015), “Donor-Centered Philanthropic Solutions for Retiring Farmers and Ranchers,” Journal of Gift Planning, http://my.pppnet.org/library/93304/2/Hays-%20Donor%20Centered%20Philanthropic%20Solutions.pdf.

Treas. Reg. § 1.170A-14 (conservation easements)

Treas. Reg. § 1.170A-7(b)(4) (remainder interest in a farm)

Rev. Rul. 55-138, 1955-1 C.B. 223 (double deductions for donated farm inventory not allowed)

Private Letter Ruling 8415030 (crop share donations)

Private Letter Ruling 201315031 (nonprofit’s operation of a ranch in accordance with its charitable purposes)

Sheppard v. U.S., 361 F.2d 972 (Ct. Cl. 1966) (approving taxpayer’s donation-then-redemption of interest in racehorses)

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