Cheryl grew up on a farm. When her parents passed away, she and her husband Dan inherited the farm.
When Cheryl was a child, the farm was out in the country. Now that the city has grown, the farm is within the city limits. Several developers would like to build homes on the farmland.
Cheryl: We received modest payments from the farm over the years, including from a neighboring farmer who rented our land for grazing. Since I inherited the farm from my parents several years ago, the value has increased a lot.
Dan: We wanted to sell the land. We also wanted to invest the proceeds from the sale so that it can grow for 10 years until we retire. When we checked with our tax advisor, she told us that if we sold the farm, we would have a large capital gains tax bill.
Cheryl: But then she told us about a plan that would provide for our retirement. She explained that we could transfer the land into a special retirement trust. Once inside this trust, the farm could be sold tax-free and the cash invested for growth. The proceeds would grow tax-free inside the trust until we retire. By the time we retire, the payouts would be taxable, but we could have as much as $900,000 in the trust.
Cheryl and Dan's advisor discussed a charitable remainder trust, or retirement trust. The retirement trust pays out either a fixed percentage of the trust assets each year or the trust income, whichever is lower. Because the trust is invested for growth instead of income, the payments from the trust will remain low while Cheryl and Dan are still working. This strategy allows the trust to grow in value so that the trust can provide greater income to Cheryl and Dan in retirement.
Dan: We took her advice and transferred the farm to the trust. We know we will enjoy a very nice retirement. We already have an IRA and are planning to use that for retirement. With the extra income from this retirement trust, we will be able to travel and really enjoy our golden years.
If you have a highly appreciated asset, such as real estate or stock, and are several years away from retirement, a retirement trust could help you sell the asset tax-free while saving for retirement. Please contact us if you have questions about a retirement trust.