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Monday, April 29, 2024
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Case Studies |
Grizzly Gordon and the Ranch LLC, Part III
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Case:
Grizzly Gordon grew up in the Big Sky country. He loves the mountain and plain vistas of this beautiful ranching country. During his youth, Grizzly acquired his nickname by discovering a grizzly bear that had gotten too near his cattle. Grizzly felled the bear with one well-aimed shot and all his neighbors called him Grizzly after that experience.
Grizzly is now 72. He has been a bachelor rancher all of his life. Grizzly loves the freedom and openness of the ranching lifestyle. He also likes the fact that he is a long way from both the state and national capitals. Grizzly is not a tax protestor, but he is interested in saving taxes.
Grizzly has supported his favorite charity with a $25 gift every year for the last 30 years. He decides that perhaps it's getting time to think about what to do with his 20,000-acre ranch when he passes away. So, after having received 42 letters and postcards from his friendly gift planner, Grizzly finally placed the call. He invited the gift planner to come out and visit him on the ranch and promised the world's finest steak dinner.
The gift planner visited Grizzly out on the ranch. It was a 90-mile trip on a paved road and then a three-mile trip up a gravel road to the ranch house. The ranch dogs were friendly to the gift planner and Grizzly quickly answered his knock at the door.
Grizzly and the gift planner enjoyed a great steak dinner and talked late into the evening. Grizzly mentioned that he had a CPA in town and his CPA had encouraged him to take the ranch and put it into a single-member limited liability company (LLC).
The gift planner responded that probably the CPA had created an LLC to own the ranch. So Grizzly responded, "Yes, I guess that Ranch LLC now owns the ranch. But I own Ranch LLC." Grizzly wonders whether he could put Ranch LLC in one of those trusts that would allow him to sell tax-free. The only hitch is that Grizzly is not ready to hang up his stirrups and wants to continue to run the ranch for another two or three years. He wonders if he can lease the ranch from the trust.
Question:
Is there a way for Grizzly to transfer the ranch to a charitable remainder unitrust (CRUT) and lease it back for three years?
Solution:
Grizzly wants to "put his house in order" by transferring the ranch to a CRUT. While a CRUT may receive a fixed payment from a lease, Grizzly is not allowed to lease the ranch. Since Grizzly is the donor to the CRUT, he is subject to the self-dealing rules of IRC 4941. Under these rules, the donor, his heirs and their spouses are prohibited from buying, leasing or otherwise using the CRUT property. The self-dealing rules are designed to protect the charitable remainder. Grizzly will need to choose another strategy to achieve his objectives.
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