Sale of Farmland to an Intentionally Defective Irrevocable Trust

Farmland has more than quadrupled in price  in the last 8 years pushing the net worth of many mid-size farmers over $5 million. If you have over $5.25 million, you have an estate tax problem. You  could owe hundreds of thousands of dollars in estate taxes.

Ignoring te situation will cause you to lose opportunities to reduce or eliminate taxes. The longer you wait, the fewer options you will have.

There are many techniques you can use to transfer farmland to your children without paying any gift or estate tax. Here is an example of an aggressive strategy to pass up to $60 million to  your children and grandchildren tax-free.

  • Set up an irrevocable trust.
  • Fund the trust with up to $5.25 million in cash.
  • Set up  an agricultural LLC and deed your farmland to the LLC.
  • Sell shares of the LLC to trust. The trust should make a down payment of at least 10% of the purchase price using the cash you gave to the trust. The trust will pay the balance with a nine year interest only promissory note with a balloon payment due at the end. The trust will use the income from the land to pay the interest and principal.

This is only a summary of the transaction. These the advantages:

  • The value of the farmland is “frozen” for gift and estate tax purposes. All future appreciation of the land is not taxed.
  • You can sell minority interest of the LLC to the trust resulting in up to a 45% discount in the purchase price because of lack of marketability and lack of control. This allows you to sell $1 million worth of farmland to the trust for only $550,000.
  • You can structure the LLC so you retain control of the LLC even though the trust will eventually own most of the LLC. Even though most of the value is out of your estate, you still control the LLC and its farmland.
  • Using your $5.25 million lifetime gift and estate tax exemption, you can transfer up to $60 million in assets to your trust tax-free using this technique.

This is not a do-it-yourself plan. There are many details that must be carefully planned.
The sale to an intentionally defective trust incorporates many advanced estate planning techniques. I plan to explain them in more detail in future posts.