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Saturday, May 4, 2024
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Case Studies |
Rodeo Rider Life Estate Produces Current Gift
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Case:
Mac Swenson loved the great outdoors. He grew up in the Big Sky country of Montana. As soon as he could walk, Mac was on a pony. By his teen years, Mac was riding horses every day. On weekends, he watched with admiration as the older cowboys practiced riding bucking broncos at the local rodeo grounds.
By age 20, Mac was riding the rodeo circuit. He soon moved up to the most exciting event at the rodeo - bareback riding on the wild and powerful Brahma bulls. Mac was lean and tough and soon gained a national reputation as a skilled and fearless Brahma bull rider. At a rodeo in Burwell, Nebraska, Mac watched with great interest as a lovely and charming young lady named Glenda Olson was crowned the rodeo queen. Mac was head over heels in love. They soon married and he used the rest of his rodeo winnings to buy a small ranch near the Beartooth Mountains in Montana. Over the years, Mac and Glenda raised four children and steadily built up the ranch. Both loved the great Big Sky country and planned to spend the rest of their days watching the sun set over the Beartooth Mountains.
As Mac and Glenda reached their sunset years, the ranch was now more than 7,000 acres. One day a new neighbor moved into the ranch next door. Glenda said, "You know Mac, our four children have left for the city, and no one is here to manage the ranch. I know we both love it here, but eventually you may need to think about selling." A few weeks later, their neighbor Bob Brown stopped in for a visit. He and Mac enjoyed talking about cattle, the weather and the hay crop. After hearing how Mac and Glenda had built up their ranch over the years, Bob mentioned that he was looking for a way to expand the size of his ranch.
Five years ago, Mac and Glenda used a sale and unitrust to sell the ranch tax-free. They transferred half of the ranch to a unitrust and half to a revocable trust. Bob paid $1,000,000 to the unitrust and $1,000,000 to a revocable trust for the entire ranch except the homestead portion. Since those 160 acres included their home, the barn and other buildings, it now has a value of $400,000.
Question:
Mac and Glenda want to live in their home for life. But they are now 75 and receiving good income from their unitrust and the revocable trust. Mac called their CPA and asked if there was a way to reduce their taxes. The CPA noted that Bob Brown had bought the rest of the ranch and thought, "Maybe he would also want the homestead portion. But how can Mac and Glenda live on that homestead portion and get a deduction?"
Solution:
Mac and Glenda have a unitrust with their favorite charity as the remainder beneficiary. Mac called the gift planner at their favorite charity and shared his situation. The gift planner said that they could retain a life estate and deed the remainder in the homestead portion to the charity. Because they will still live in their home, the charitable deduction is just over $220,000. This appreciated property deduction may save taxes for four or five years.
Mac and Glenda decided to make this remainder gift. They deeded the property remainder to their favorite charity and signed a maintenance, insurance and taxes agreement. Bob was aware that Mac and Glenda were creating a charitable retained life estate on their homestead portion, but he wanted the entire ranch, and did not need the home, since he had a very fine residence on his own ranch. As soon as the deed was recorded, Bob called the charity to see if they would name their price to allow him to purchase the remainder interest in the ranch's homestead portion. Based on an appraisal of the property, the gift planner offered to sell the remainder in the homestead portion for $220,000 to Bob. Bob promptly wrote a check to the charity for $220,000 and bought the remainder interest in the Swenson ranch homestead portion.
Mac and Glenda still live on their lovely ranch, Bob Brown will own it when they pass away and their favorite charity has a current gift of $220,000.
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