Financial Strategies For Selling A Farm Or Ranch | A Series Of Wealth Guide By Solid Rock Wealth...
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Financial Strategies for Selling a Farm or Ranch By: Christopher Nolt, LUTCF and John Clark, CPA An Educational Resource From Solid Rock Wealth Management Selling a farm or ranch typically creates significant tax consequences.Without proper planning prior to a sale, the wealth a family has worked a lifetime to create may be eroded by up to 50% or more. This Wealth Guide will illustrate the sale of a highly appreciated $15 million ranch.The ranch is owned by a married couple ages 65 and residents of Montana. It will examine how the use of proven wealth preservation strategies can allow a family to: · Decrease taxes paid on the sale · Increase annual income for retirement · Increase wealth passed to heirs · Increase money left to charitable organizations The advanced planning strategies include: · IRC Section 1031 Tax-Deferred Exchange · IRC Section 664 Charitable Remainder Trust · IRC Section 121 Personal Residence Exclusion · Strategic sale price allocation · Irrevocable Life Insurance Trust Four sale scenarios are illustrated: Option 1:Straight sale for cash of the ent ranch Option 2:Straight sale for $10 million and Exchange for $5 million Option 3:Straight sale for $5 million, 103 $5 million and Charitable Remainder (CRT) million Option 4: Straight sale for $5 million, 10 $5 million, Charitable Remainder Trust for purchase of a $5 million Second-To-Die Lif Policy in an Irrevocable Life Insurance Tr Below is a summary of each of the four opt pages that follow provide greater detail. illustrative purposes only and are not int sent any one particular situation. Summary Option 1 Straight Sale Federal and State Income Tax Liability Annual Income from Reinvestment To Charity Upon Second Death Net Estate Passed to Heirs $2,890,200 $847,686 $0 $19,516,837 Option 2 1031 Exchange & Straight Sale $1,980,486 $911,366 $0 $23,525,457 Option 3 1031 Exchange, CRT & Straight Sale $638,074 $1,005,335 $5,000,000 $22,565,485 Option 4 1031 Exchange, CRT, ILIT & Straight Sale $638,074 $870,335 $5,000,000 $25,529,095 1
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Selling a farm or ranch typically creates significant tax consequences. Without proper planning prior to a sale, the wealth a family has worked a lifetime to create may be eroded by up to 50% or more. Here is the first issue of the wealth management guide by Wyoming financial advisor Christopher Nolt on selling a farm or ranch. Follow us on "Google.com/+SolidRockWealthManagementBozeman" to find out more about Wealth Guides by Solid Rock Wealth Management.
Transcript of Financial Strategies For Selling A Farm Or Ranch | A Series Of Wealth Guide By Solid Rock Wealth...
Financial Strategies forSelling a Farm or Ranch
By: Christopher Nolt, LUTCF and John Clark, CPA
An Educational Resource FromSolid Rock Wealth Management
Selling a farm or ranch typically creates significant taxconsequences.Without proper planning prior to a sale,the wealth a family has worked a lifetime to create maybe eroded by up to 50% or more.
This Wealth Guide will illustrate the sale of a highlyappreciated $15 million ranch.The ranch is owned bya married couple ages 65 and residents of Montana. Itwill examine how the use of proven wealth preservationstrategies can allow a family to:· Decrease taxes paid on the sale· Increase annual income for retirement· Increase wealth passed to heirs· Increase money left to charitable organizations
The advanced planning strategies include:· IRC Section 1031 Tax-Deferred Exchange· IRC Section 664 Charitable Remainder Trust· IRC Section 121 Personal Residence Exclusion· Strategic sale price allocation· Irrevocable Life Insurance Trust
Four sale scenarios are illustrated:
Option 1:Straight sale for cash of the entire $15 millionranch
Option 2:Straight sale for $10 million and 1031Exchange for $5 million
Option 3:Straight sale for $5 million, 1031 Exchange for$5 million and Charitable Remainder (CRT) Trust for $5million
Option 4: Straight sale for $5 million, 1031 Exchange for$5 million, Charitable Remainder Trust for $5 million andpurchase of a $5 million Second-To-Die Life InsurancePolicy in an Irrevocable Life Insurance Trust (ILIT)
Below is a summary of each of the four options.Thepages that follow provide greater detail. Scenarios are forillustrative purposes only and are not intended to repre-sent any one particular situation.
SummaryOption 1
Straight Sale
Federal and StateIncome Tax Liability
Annual Incomefrom Reinvestment
To Charity UponSecond Death
Net Estate Passed toHeirs
$2,890,200
$847,686
$0
$19,516,837
Option 2
1031 Exchange &Straight Sale
$1,980,486
$911,366
$0
$23,525,457
Option 3
1031 Exchange, CRT& Straight Sale
$638,074
$1,005,335
$5,000,000
$22,565,485
Option 4
1031 Exchange, CRT,ILIT & Straight Sale
$638,074
$870,335
$5,000,000
$25,529,095
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Summary Schedule
TAX & ESTATE PLANNING ANALYSIS
Straight Sale
Total Tax Paid on Sale
Effective Tax Rate
$2,890,200
19.27%
1031 Exchange &Straight Sale
$1,980,486
13.20%
1031 Exchange,CRT & Straight Sale
$638,074
7.14%
1031 Exchange, CRT,ILIT & Straight Sale
$638,074
7.14%
Projected annual cash flow (before tax):
Cash Investment (7%)
1031 Investment (7%)
CRT Investment (7%)
Life Insurance Premium
Total Annual Cash Flow
$847,686
0
0
$847,686
$561,366
$350,000
0
$911,366
$305,335
$350,000
$350,000
$1,005,335
$305,335
$350,000
$350,000($135,000)
$870,335
Projected net estate to living heirs:
Cash on hand
Additional cash from reinvesting cashflow in excess of $200,000 per year (22.8years life expectancy, after 35% tax)
1031 Exchange Property Future Valuewith 2.5% annual appreciation
ILIT Payout 0$24,641,288
$12,109,800 $8,019,514 $4,361,926 $4,361,926
$12,531,488 $14,009,293
$8,779,588
0$30,808,395
$16,190,002
$8,779,588
0$29,331,516
$13,057,093
$8,779,588
$5,000,000
$31,198,607
Amount to charity upon second death:
CRT
Other donations
0
0
0
0
0
0
$5,000,000
0
$5,000,000
$5,000,000
0
$5,000,000
Estate Tax Analysis
Value of EstateExclusion - with Credit Shelter Trust
Exclusion - ILIT Proceeds
Taxable Estate
$24,641,288
($10,000,000)
$14,641,288
$30,808,395
($10,000,000)
$20,808,395
$29,331,516
($10,000,000)
$19,331,516
$31,198,607
($10,000,000)
($5,000,000)
$16,198,607
Estimated Estate Tax 35%
Net Estate left to heirs
$5,124,451
$19,516,837
$7,282,938
$23,525,457
$6,766,030
$22,565,485
$5,669,512
$25,529,095
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Straight SaleTAX & ESTATE PLANNING ANALYSIS
Sale Price: $15,000,000Land
Sales Price Allocation $14,000,000
93.33%
Original Cost
Accumulated Depreciation
Basis
Realized Gain
Recapture Gain
Capital Gain $12,800,000
$12,800,000
Projected Tax
Federal1245 Recapture Gain (35%)
1250 Recapture Gain (25%)
Long Term Capital Gain (15%)
Total Federal Tax
StateRecapture Rate (6.9%)
Capital Gain (4.9%)
Total State Tax
Total Tax Liability
0
$627,200$627,200
$2,547,200
$6,900
0$6,900
$31,900
$41,400
0$41,400
$251,400
0
$14,700$14,700
$59,700
$48,300
$641,900$690,200
$2,890,200
0
0
$1,920,000
$1,920,000
0
$25,000
0
$25,000
$210,000
0
0
$210,000
0
0
$45,000
$45,000
$210,000
$25,000
$1,965,000
$2,200,000
$1,200,000
0
$1,200,000
$12,800,000
Building
$100,000
0.67%
$100,000
$100,000
0
$100,000
$100,000
0
$100,000
Equipment & Livestock
$600,000
4.00%
$700,000
$700,000
0
$600,000
$600,000
0
$600,000
Raised Livestock
$300,000
2.00%
0
0
0
$300,000
0
$300,000
$300,000
$2,000,000
$800,000
$1,200,000
$13,800,000
$700,000
$13,100,000
$13,800,000
Total
$15,000,000
CASH FLOW
Net Cash After Tax
Effective Tax Rate
Projected Annual Income (Cash Investment)
Total Annual Income
$11,452,800
19.27%
$847,686
$847,686
$68,100 $348,600 $240,300 $12,109,800
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1031 ExchangeTAX & ESTATE PLANNING ANALYSIS
Sale Price: $15,000,000
LandSales Price Allocation $14,000,000
93.33%
$1,200,000
0
$1,200,000
($5,000,000)
$8,228,571
0
$8,228,571
$8,228,571
Building
$100,000
0.67%
$100,000
$100,000
0
0
$100,000
$100,000
0
$100,000
Equipment & Livestock
$600,000
4.00%
$700,000
$700,000
0
0
$600,000
$600,000
0
$600,000
Raised Livestock
$300,000
2.00%
0
0
0
0
$300,000
0
$300,000
$300,000
Total
$15,000,000
Original Cost
Accumulated Depreciation
Basis
1031 Exchange
Realized Gain
Recapture Gain
Capital Gain
$2,000,000
$800,000
$1,200,000
($5,000,000)
$9,228,571
$700,000
$8,228,571
$9,228,571
Projected Tax
Federal1245 Recapture Gain (35%)
1250 Recapture Gain (25%)
Long Term Capital Gain (15%)
Total Federal Tax
StateRecapture Rate (6.9%)
Capital Gain (4.9%)
Total State Tax
Total Tax Liability
0$403,200$403,200
$1,637,486
$6,900
0$6,900
$31,900
$41,4000
$41,400
$251,400
0
$14,700$14,700
$59,700
$48,300$417,900$466,200
$1,980,486
0
0
$1,234,286
$1,234,286
0
$25,000
0
$25,000
$210,000
0
0
$210,000
0
0
$45,000
$45,000
$210,000
$25,000
$1,279,286
$1,514,286
CASH FLOW
Net Cash After Tax
Effective Tax Rate
Projected Annual Income (Cash Investment)Projected Annual Income (1031)
Total Annual Income
$7,362,514
13.20%
$561,366$350,000
$911,366
$68,100 $348,600 $240,300 $8,019,514
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TAX & ESTATE PLANNING ANALYSIS
Sale Price: $15,000,000
Sales Price Allocation
1031 Exchange and CRT
Land
$14,000,000
93.33%
$1,200,000
0
$1,200,000
($5,000,000)($5,000,000)
Building
$100,000
0.67%
$100,000
$100,000
0
00
Equipment & Livestock
$600,000
4.00%
$700,000
$700,000
0
00
Raised Livestock
$300,000
2.00%
0
0
0
00
Total
$15,000,000
Original Cost
Accumulated Depreciation
Basis
1031 Exchange
CRT
$2,000,000
$800,000
$1,200,000
($5,000,000)
($5,000,000)
Realized Gain
Recapture Gain
Capital Gain
Projected Tax
Federal1245 Recapture Gain (35%)
1250 Recapture Gain (25%)
Long Term Capital Gain (15%)
Total Federal Tax
StateRecapture Rate (6.9%)
Capital Gain (4.9%)
Total State Tax
Total Tax Liability
Charitable Deduction
Charitable Contribution (Tax Savings)FederalState
Net Tax Liability
$3,657,143
0
$3,657,143
$3,657,143
$100,000
$100,000
0
$100,000
$600,000
$600,000
0
$600,000
$300,000
0
$300,000
$300,000
$4,657,143
$700,000
$3,957,143
$4,657,143
0
0
$548,571
$548,571
0
$25,000
0
$25,000
$210,000
0
0
$210,000
0
0
$45,000
$45,000
$210,000
$25,000
$593,571
$828,571
0$179,200$179,200
$727,771
$662,550
$6,900
0$6,900
$31,900
$100,000
$41,4000
$41,400
$251,400
$600,000
0
$14,700$14,700
$59,700
0
$48,300$193,900$242,200
$1,070,771
$1,362,550
$99,383$50,015
$578,373
$25,000$6,900
0
$210,000$41,400
0
00
$59,700
$334,383$98,315
$638,074
CASH FLOW
Net Cash After Tax
Effective Tax Rate
Projected Annual Income (Cash Investment)Projected Annual Income (1031 Investment)Projected Annual Income (CRT Investment)
Total Annual Income
$3,421,626
7.14%
$305,335$350,000
$350,000
$1,005,335
$100,000 $600,000 $240,300 $4,361,926
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1031 Exchange, CRT, AND ILITTAX & ESTATE PLANNING ANALYSIS
Sale Price: $15,000,000
Sales Price Allocation
Land
$14,000,000
93.33%
$1,200,000
0
$1,200,000
($5,000,000)
($5,000,000)
Building
$100,000
0.67%
$100,000
$100,000
0
00
Equipment & Livestock
$600,000
4.00%
$700,000
$700,000
0
00
Raised Livestock
$300,000
2.00%
0
0
0
00
Total
$15,000,000
Original Cost
Accumulated Depreciation
Basis
1031 Exchange
CRT
$2,000,000
$800,000
$1,200,000
($5,000,000)
($5,000,000)
Realized Gain
Recapture Gain
Capital Gain
Projected Tax
Federal1245 Recapture Gain (35%)
1250 Recapture Gain (25%)
Long Term Capital Gain (15%)
Total Federal Tax
StateRecapture Rate (6.9%)
Capital Gain (4.9%)
Total State Tax
Total Tax Liability
Charitable Deduction
Charitable Contribution (Tax Savings)FederalState
Net Tax Liability
$3,657,143
0
$3,657,143
$3,657,143
$100,000
$100,000
0
$100,000
$600,000
$600,000
0
$600,000
$300,000
0
$300,000
$300,000
$4,657,143
$700,000
$3,957,143
$4,657,143
0
0
$548,571
$548,571
0
$25,000
0
$25,000
$210,000
0
0
$210,000
0
0
$45,000
$45,000
$210,000
$25,000
$593,571
$828,571
0$179,200$179,200
$727,771
$662,550
$99,383$50,015
$578,373
$6,900
0$6,900
$31,900
$100,000
$25,000$6,900
0
$41,4000
$41,400
$251,400
$600,000
$210,000$41,400
0
0
$14,700$14,700
$59,700
0
00
$59,700
$48,300$193,900$242,200
$1,070,771
$1,362,550
$334,383$98,315
$638,074
CASH FLOW
Net Cash After Tax
Effective Tax Rate
Projected Annual Income (Cash Investment)Projected Annual Income (1031 Investment)Projected Annual Income (CRT Investment)Less: ILIT Premiums
Total Annual Income
$3,421,626
7.14%
$305,335$350,000$350,000(135,000)
$870,335
$100,000 $600,000 $240,300 $4,361,926
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Wealth Advisory Team
Effective planning for the sale of a farm or ranch requires a team approach. No one advisor can provide thelevel of expertise you need in each area.
Your wealth advisory team may consist of:
1.2.3.4.5.6.7.8.9.
Ranch BrokerCertified Public AccountantEstate Planning AttorneyCharitable Giving SpecialistInvestment Advisor1031 Exchange IntermediaryCommercial Real Estate AgentLife Insurance AgentReal Estate Appraiser
Coordinating a team of professionals with expertise in each area can be a time-consuming task. A wealth man-agement consultant can assist you with this difficult job.They will collaborate with you and your team to ensureevery area is properly addressed so you achieve your goals in the most effective manner possible.
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Chris Nolt is the owner of Solid Rock Wealth Management and Solid Rock Realty Advisors, LLC, located in Bozeman, Montana. Solid Rock
Wealth Management is an independent wealth management firm that specializes in working with families who are selling a farm or ranch
and transitioning to the next phase of their lives. Solid Rock Wealth Management employs a comprehensive planning approach with a team
of financial professionals, which addresses retirement planning, investment planning, estate planning, tax planning, risk management,
wealth preservation and other components.
Solid Rock Realty Advisors, LLC is a commercial real estate consulting firm specializing in offering secure income-producing commercial
real estate investments, primarily office buildings leased to the U.S. Federal Government. These properties offer long-term leases guaran-
teed by the U.S. Government with tenants such as: Social Security Administration, FBI, Homeland Security and many other federal agencies.
Chris Nolt, LUTCF
Chris grew up in Lewistown, Montana. Working on ranches throughout his high school and college days, Chris gained a deep respect for the work
ethic and character of the agricultural family. Having seen the effects from a lack of good planning among the agricultural community, Chris deter-
mined to help these ranch families make smart decisions with their money so they could preserve the wealth they worked so hard to create. For
over 23 years, Chris has been helping agricultural families reduce taxes, invest wisely and preserve their wealth.
John Clark, CPA
John grew up on a farm in southeastern Idaho.He attended Ricks College and Brigham Young University where he graduated with bachelor’s and
master’s degrees in accounting with an emphasis in information systems consulting. In January of 1992, John started working with Rudd & Company.In
2003, John became a Partner and is currently serving on Rudd & Company’s executive committee. The majority of his time is spent in the tax and busi-
ness advisory areas. He helps his clients with complex business entity structuring to save taxes, protect assets and provide a vehicle for estate plan-
ning.John has been involved in numerous real estate transactions for his clients. Having grown up on a farm and ranch he has also developed a niche in
the farm and ranch taxation. John has served on the boards of many civic organizations. He lives in Bozeman with his wife, Julie, and their five children.
To request a free Wealth Guide on any of the planning strategies discussed in this paper, call 406-582-1264.
Solid Rock Wealth Management and Solid Rock Realty Advisors, LLC
2020 Charlotte Street,Bozeman, MT 59718 • 406-582-1264
www.solidrockwealth.com www.solidrockproperty.com
John Clark, CPA offers tax services through Rudd & Company, a Bozeman CPA firm. John Clark and the entity of Rudd & Company are not affiliated with Solid Rock Wealth
Management, Solid Rock Realty Advisors or Independent Financial Group, LLC. This material was created to provide accurate and reliable information on the subjects covered. It
is not, however, intended to provide specific legal, tax or other professional advice. Tax information provided can be sourced at www.irs.gov and your state’s revenue department
website. Because individuals’ situations and objectives vary, this information is not intended to indicate suitability for any particular individual. IRC Section 1031 and IRC Section
664 Charitable Remainder Trust are complex tax codes. The services of an appropriate tax or legal professional should be sought regarding your individual situation. Solid Rock
Wealth Management is licensed to sell securities in the following states: MT, Licensed to sell fee-based advisory services in the following states:
MT, WY, ID, AZ, MN, AK and licensed to sell insurance in MT.
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