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Monday, May 6, 2024
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Case Studies |
Rodeo Rider at the Great Roundup in the Sky
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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 twenty, 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. 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 of $400,000. Eight years ago they gave the remainder interest in the home quarter to their favorite charity. The remainder interest was later sold by the charity to Bob Brown.
Question:
Glenda passed away in November at age 88. Suffering from a broken heart, Mac passed away the next month. Their executor is now tending to their final affairs and the distribution of their estate. Two years ago, Mac and Glenda had called their gift planner and mentioned that they still held one other parcel of land. This ranchland was leased to a neighbor. Since they wanted to continue the lease, they gave the remainder interest in that ranchland to their favorite charity and continued to receive the lease income. The charity sold this remainder interest in that land to Mac's neighbor Bob Brown. The executor and estate attorney now want to complete the estate tax return. How do they treat the remainder interest in that last parcel?
Solution:
The estate planner is concerned about the IRS claiming a nondeductible transfer under Sec. 2036(a) and thus an inclusion of the ranchland in the value of the taxable estate at death. If Mac and Glenda gave the remainder interest in the ranchland to charity, there was an income tax deduction for the gift of the remainder interest in the ranchland under Sec. 170(f)(3)(B). At death, the life estate would benefit the charity, and there is an estate deduction under Sec. 2055(a). The estate attorney was concerned because the charity sold the land to Bob Brown. Since the property was not transferred at death to charity, the attorney wondered if there might not be an estate tax charitable deduction.
However, the estate planner researched the situation. The charity received the remainder interest in the ranchland without any restrictions on the remainder, and thus the charity had full rights and control to dispose or use the remainder interest as it pleased. Regardless of the sale from the charity to Bob Brown, the retained life estate interest will be included in Mac's estate under Reg. 20.2036-1 and there will be a corresponding estate tax charitable deduction equal to the remainder value to charity.
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