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Saturday November 27, 2021

Case of the Week

Grizzly Gordon and the Ranch LLC

Case:

Grizzly Gordon grew up in the Big Sky country. He loves the mountain and plain vistas of this beautiful ranching country.

Grizzly is now 72. He decides that perhaps it's getting time to think about deciding what to do with his 20,000 acre ranch when he passes away. Grizzly has supported his favorite charity with a $25 gift every year for the last 30 years. After having received friendly letters and postcards from the charity's gift planner, Aaron, Grizzly finally placed the call. He invited Aaron to come out and visit him and promised the world's finest steak dinner.

Aaron visited Grizzly at his home adjacent to the ranch. Grizzly and Aaron enjoyed a great steak dinner and talked late into the evening. Grizzly mentioned that he had an attorney in town, Paula, who had encouraged him to put the ranch into a single member LLC.

Aaron asked whether Grizzly had given Paula's suggestion some consideration. Grizzly responded, "Yes, Ranch LLC now owns the ranch. But I own Ranch LLC." Grizzly wondered whether he could put Ranch LLC in a trust that would allow for a tax-free sale and ultimately benefit his favorite charity.

Question:

Is there a way for Grizzly to fund a charitable remainder unitrust with Ranch LLC?

Solution:

Grizzly would like to be involved with the ranch, but he no longer has the ability to work and manage it without help. Since it is an operating ranch with land, cattle and equipment to cut and bale hay, there could be unrelated business taxable income (UBTI). Under Sec. 512(c) an LLC treated as a partnership will cause the UBTI to flow through to a unitrust. With an operating ranch, transfer of the LLC to a CRT could subject the unitrust to a 100% excise tax on the UBTI. Sec. 664(c)(2)(A). While the tax may not be large if the asset is sold quickly, Grizzly wants to minimize the tax on UBTI.

Grizzly's attorney, Paula, recommended a plan to achieve all objectives. First, she contacted a farm and ranch realtor and discussed the possible options for sale of the ranch. Fortunately, there was a potential buyer who expressed interest in the ranch. Paula told the realtor to keep the buyer "warmed up and waiting in the wings," but there was no agreement or contract for sale of the ranch. Second, Grizzly created a charitable remainder unitrust with Paula's assistance and then transferred the entire ranch into the unitrust with Paula as initial trustee. Third, Paula, in her role as trustee, contacted the prospective buyer. After a short period of negotiation, the buyer agreed to purchase the LLC which owned the land, cattle and equipment.

Within one month, the sale was completed. The unitrust sold the entire ranch and bypassed the capital gain on the sale. There was a modest amount of unrelated taxable income that had to be paid to the IRS as an excise tax, but that was a small cost compared to the tax savings. After the trust received the cash, Paula resigned as trustee and Grizzly's favorite charity assumed that role.

This "near zero" tax plan for the sale of the ranch provided Grizzly with the typical unitrust benefits. There was still a bypass of capital gain and a charitable income tax deduction, plus the favorable tax benefits of the unitrust payments.

After the sale, Grizzly was able to assist as a volunteer in some of the ranch activities. With his newfound free time and the income from his trust, Grizzly became known as the area philanthropist and helped the needy throughout his county.

Published October 15, 2021
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