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Thursday, May 2, 2024
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Case Studies |
Grizzly Gordon and the Ranch LLC, Part IV
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Case:
Grizzly Gordon grew up in the Big Sky country. He loved 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 capital. 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 the CPA had likely created a LLC to own the ranch. So Grizzly responded, "Yes, I guess that Ranch LLC now owns the ranch. But I own Ranch LLC." Grizzly wondered whether he could put Ranch LLC into one of those trusts that would allow him to sell tax-free. As is the case with many ranchers, Grizzly is land rich and cash poor.
Question:
Grizzly wondered, can he sell part of the ranch for cash and transfer the balance to a unitrust?
Solution:
Grizzly can indeed receive cash and still fund a unitrust. After speaking with his CPA, Grizzly decided to sell one-third of the ranch for cash and two-thirds tax-free through the unitrust. But there were several steps that needed to be taken in careful order. First, Grizzly set up the unitrust and a revocable trust, with his CPA as initial trustee. He then deeded two-thirds of the property from the LLC to the unitrust and one-third to the revocable trust. Since the CPA is trustee of both trusts, there is reduced risk of an IRS claim that there existed a prearranged sale or of a possible claim that Grizzly has engaged in indirect self-dealing. Second, the CPA listed the property for sale. Buyers soon contacted the CPA, and the ranch was sold within 90 days. At that time, the CPA allocated the proceeds in the correct shares to the unitrust and the revocable trust. Since the charitable deduction flows through the LLC to Grizzly, he sold the two-thirds tax-free and received a substantial deduction. While the one-third sold through the revocable trust is taxable, the charitable deduction offset nearly all of that tax. Grizzly then terminated the LLC, since it was no longer needed. With the permission of the new owner, Grizzly is often seen riding his favorite horse across the ranch into the sunset.
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