Making a gift of farm machinery can be a smart way to provide you with income for retirement, avoid paying ordinary income tax, and ensure that the research discoveries and lifesaving care we provide at Mayo Clinic continue in the future.
Oftentimes, tractors and other large pieces of farm equipment become fully depreciated. If you sell the equipment, you will be taxed on the entire amount of the sales proceeds because the gain realized is considered ordinary income. Depending on your tax bracket and state of residence, this may mean income tax equal to over 40% of the sale price. However, if you transfer the equipment to a charitable remainder unitrust, you avoid paying taxes, and it can provide you with lifetime income for retirement.
How It Works
You give farm machinery to a special kind of charitable remainder unitrust called a flip CRUT. The trustee will pay income to you (and to other beneficiaries, if you so choose) during your lifetime or for a period of up to 20 years. The “flip” triggering event may be the sale of the farm equipment or a date, and your income will start after the farm machinery is sold. The amount of income varies each year based on the annual value of the trust. After the trust term, the remaining balance paid to Mayo Clinic helps support our research and care for generations — plus, it’s free from federal estate taxes.
An Example From Mayo Clinic
John and Mary would like to generate some additional retirement income and have fully depreciated farm equipment valued at $1 million that they no longer need. They talk with their attorney about transferring these assets to a CRUT. John and Mary create a flip CRUT with annual lifetime payments equal to 5% of the fair market value of the trust assets as revalued annually. Future payments vary each year depending on the annual valuations of the trust assets. They now can feel comfortable knowing they will receive lifetime payments during their retirement years and help support valuable research at Mayo Clinic.
A few items to keep in mind when considering a gift of farm machinery:
- You cannot enter into a sale or auction agreement to sell the farm machinery before funding the trust. This would be considered a prearranged sale, and you would be taxed on the gain.
- Avoid unrelated business income tax. The trustee cannot conduct a regular sale of the machinery you have transferred to the trust. Ideally, the trustee would sell all machinery to a single buyer or at a single auction.
- The contribution is considered a gift of tangible personal property. If the farm machinery is not fully depreciated, you may receive a federal income tax charitable deduction in the year the trustee sells the machinery.
- A charitable remainder unitrust is not a good vehicle for passing on property to later generations while making a charitable gift at the same time. If the next generation will continue to farm, purchasing machinery from a CRUT is not allowed.
- The payments to you from the CRUT are taxable; however, the deferral feature allows you to spread the income tax generated by the sale of the farm machinery over many years (and you may end up avoiding some of the tax altogether).
We can help you get started on a plan that boosts your retirement income and helps Mayo Clinic. Contact Mayo Clinic Office of Gift Planning at firstname.lastname@example.org or 1-800-297-1185 to learn more.
Information contained herein was accurate at the time of posting. The information in this publication is not intended as legal or tax advice. For such advice, please consult an attorney or tax advisor. Figures cited in any examples are for illustrative purposes only. References to tax rates include federal taxes only and are subject to change. State law may further impact your individual results. Mayo Clinic policies may impact gift acceptance, gift structure, and options available. California residents: Annuities are subject to regulation by the State of California. Payments under such agreements, however, are not protected or otherwise guaranteed by any government agency or the California Life and Health Insurance Guarantee Association. Oklahoma residents: A charitable gift annuity is not regulated by the Oklahoma Insurance Department and is not protected by a guaranty association affiliated with the Oklahoma Insurance Department. South Dakota residents: Charitable gift annuities are not regulated by and are not under the jurisdiction of the South Dakota Division of Insurance.