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Wednesday, May 1, 2024
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Case Studies |
Rodeo Rider Life Estate Rollover
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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.
Thirteen 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. Their neighbor Bob Brown paid $1,000,000 to the unitrust and $1,000,000 to a revocable trust for the entire ranch except the homestead portion. Since that 160 acres included their home, the barn and other buildings, it had a value to $400,000. Eight years ago they gave the remainder interest in the homestead portion to their favorite charity. The charity decided to sell the remainder value to Bob Brown.
Question:
Mac and Glenda are now age 83. They both love the ranch, but his old rodeo injuries are "acting up" and Mac now needs to be closer to medical care. Mac and Glenda called the gift planner from their favorite charity and asked if there were any options to consider. What should they do with their right to live on the ranch for their lifetimes?
Solution:
The gift planner quickly estimated the value of their life estate in the homestead portion. Based upon the current value of $550,000 and their ages of 83/83, the value of their life interest is about $138,000. With this $138,000 in value, they have a few options: they could make another charitable gift, sell it and receive cash or use it to fund a charitable gift annuity.
Mac noted, "I have friends who have gift annuities. I like idea of the fixed payments. Do we get another tax deduction?"
"Yes," responded the gift planner. "You will receive fixed payments of $8,280 per year, a charitable tax deduction of more than $62,000 and half of your payouts are tax-free!"
Mac and Glenda still had the income from their unitrust and substantial savings, but decided they liked the gift annuity. So they signed a deed giving their favorite charity the life interest in their homestead portion in exchange for a gift annuity. They then moved into town to Sunny Acres Retirement Community, where they enjoy the many activities.
But what can the charity do with a life interest in the homestead portion? The gift planner called Bob Brown, who owned the remainder interest. He had always wanted the entire ranch and previously bought the remainder interest in the homestead portion. Bob was quite willing to pay $138,000 for the life interest and take full title immediately. Upon receiving the payment from Bob, the charity transferred the $138,000 to their gift annuity reserve account.
Net result – Mac and Glenda enjoy the charitable gift annuity payments and their many friends at Sunny Acres. In addition, the other residents are delighted to hear Mac's stories about his early days on the rodeo circuit.
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