When Harold and Mary Tilstra sold their farm equipment last summer, many people at the auction congratulated them on the sale but remarked about tax implications of the proceeds.
What they didn’t know was that some of the Tilstra machinery was in charitable trust, and at the end of the day the otherwise taxable income became a tax-deductible donation.
“We were looking at a way to manage cash flow and tax consequences of a farm machinery auction sale,” Harold said.
Before they arranged the equipment sale, the Tilstras worked with their accountant and attorney to set up a charitable remainder trust, as it’s called. Then they had their farm machinery appraised for an estimated value and transferred ownership of some of the machinery to the trust before the auction sale.
“Part of the value of the machinery in the charitable remainder trust became a charitable donation for that year,” Harold said. “The donation offset some of the tax liability.”
Mary said it saved them a significant amount in taxes, but also provided an option for stable income in retirement.
“Our machinery was paid for and fully depreciated, so all the auction sale would have been added to taxable income for that year,” Mary said.
Mary said she’s surprised more farm retirees aren’t utilizing the tool, especially since it’s a valuable retirement planning option as well.
“The charitable remainder trust is a tool for anyone who wants to support a charity while managing taxable income,” she said.
“Otherwise you end up working toward retirement, and then you have this great big auction that represents your earnings over time, but it’s taxed all in one year.”
Here’s how it works:
The Tilstras’ money from the sale of the machinery in the trust is locked into the irrevocable trust, and each year they’ll receive 5 percent of the value of the trust fund.
“That word ‘irrevocable’ tends to scare people, because all of us have a hard time giving up control,” Harold said. “We managed the farm for 41 years, so it was definitely a decision process to walk away from that.”
As it turns out, the “irrevocable” part of the arrangement is something they enjoy about the arrangement, he said.
“We don’t have to think about it,” Harold said.
Depending on how well the trust funds are invested, the value of the account — and therefore the 5-percent disbursement — fluctuates with markets.
“If it’s invested decently, it’s safe to assume we can receive distributions for the next 20 years or more into retirement,” Harold said about the disbursements, which are taxable like IRA payouts.
In the Tilstras’ case, the remainder of the trust is paid out to the charity after their death. They chose the beneficiary of the trust to be the Luverne Area Community Foundation.
LACF director Emily Crabtree worked with the Tilstras on the process.
“Especially in this community, CRTs are the way to plan for retirement income, manage taxes and donate to a cause you care about.”
Transferring wealth doesn’t mean letting go
Crabtree said too many people view “transfer of wealth” as giving up their income and their options.
“That’s not true at all,” Crabtree said.
“You decide what’s going into the trust, and while you’re still living, you and your financial adviser decide the strategy for your retirement income percentage.”
But then, upon both passing, the remainder goes into the fund that’s established as the charity.”
While CRTs have been available for many years, it’s a relatively new option for LACF donors.
“We’ve worked very hard in the last seven years to bring that vehicle to our donors,” said foundation director Emily Crabtree. “It’s always been available, but we weren’t in a position to be able to offer it.”
Now, she said, LACF has connections with local professionals to deliver the product.
“We have a relationship with local advisers with tools and agents and knowledge to uphold what a donor is able to do,” Crabtree said. “And it’s our responsibility to carry out the wishes as the donor intended.”
In the Tilstras’ case, they established the “Harold and Mary Tilstra Endowment Fund” as their recipient charity to be used for LACF operations.
But Crabtree said a remainder trust could be designated to any nonprofit or organization through the LACF.
“It can be a forever gift to your church or to whomever … you just write that in the agreement with us,” she said. “There are a lot of creative ways to use charity to help with tax benefits, - talk to your adviser about what your needs are.”
Plan for retirement while leaving a legacy
Crabtree said as more Baby Boomers retire, she’s hoping to help others in the community use the tool to transfer wealth.
“When you’re transitioning out of a farm, when you’re transitioning out of a business, when you’ve had a large sale of something … using a charitable remainder trust is a great vehicle to save you a lot of money and has a retirement perk in it as well,” Crabtree said.
The Tilstras said it’s comforting to have the arrangement in place.
“We feel really, really grateful,” Harold said. “Anybody who wants to have a vehicle to manage cash flow and tax implications, this is a way to accomplish a number of retirement investment goals all in one plan.”
He said it’s not about avoiding taxes; rather, it helps to manage it over a longer period of time.
“Sometimes you’re lucky enough to do something that you look back on and feel really good about,” Harold said. “This is one of those things.”
Mary said, “As we get to understand it, it’s a win-win. There are just no negatives,”
Crabtree said her favorite part of the plan is that it’s an opportunity to help retirees live out their dream while helping local causes they care about.
“We live here, we built our business here, we grew up here, we made our money here, now let’s leave our money here,” she said.
“It allows donors to make a long-term impactful gift in the community where they have lived, plus it allows them tax relief.”
But it has to be planned ahead.
“Talk to your financial adviser. That’s where it has to start,” Crabtree said. “It’s a very thought-out, planned giving tool.”
Photo and story Courtesy of Lori Sorenson (Editor of Star Herald)