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Sunday June 26, 2022

Case of the Week

Rodeo Rider Sale and Unitrust


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. One day a new neighbor moved into the ranch next door. Glenda said, "You know Mac, our four children have left for the city, and no one is here to manage the ranch. I know we both love it here, but eventually you may need to think about selling." A few weeks later, their neighbor Bob Brown stopped in for a visit. He and Mac enjoyed talking about cattle, the weather and the hay crop. After hearing how Mac and Glenda had built up their ranch over the years, Bob mentioned that he was looking for a way to expand the size of his ranch.


If Mac and Glenda are ready to consider retirement, how can they do this in a way that reaches their goals? Mac and Glenda want to live in their home, would like to give up managing the ranch, need a good retirement income, and want to pass some benefits on to their children. While he always pays his fair share of taxes, Mac would like to make this transition with no added taxes. However, there is a mortgage on the ranch. What can Mac and Glenda do?


The first of the options offered as part of the Swenson solution is a sale and unitrust for most of the land. A life estate will be needed for the homestead portion so they can continue to live there. But there is the problem of the $200,000 debt. Mac has been told that because the debt is less than five years old, they cannot use the unitrust to sell the property tax-free. Since the ranch is worth $2,000,000, Mac called his CPA Bill West and asked, "What shall we do about the mortgage on the ranch?"

Bill said that there were four potential solutions to the debt problem. First, Mac and Glenda could cash in their stored hay and crops and pay off the debt. Second, they could transfer the debt to part of the ranch and sell that for cash. Third, they could use the crops as collateral and borrow the $200,000 to pay off the debt, in a bridge loan. Fourth, they could sell in a bargain sale a part of the ranch to their favorite charity and pay off the debt.

After discussing the options with Bill, Mac decided to use number three – the bridge loan. He borrowed $200,000 and paid off the mortgage on his land. Mac and Glenda then transferred all of the ranch to a unitrust except the homestead portion that was placed into a revocable trust with Bill as initial trustee. Bill then called Bob Brown and informed him that the ranch was for sale. Bob used a small part of the cash from his latest movie to pay $2,000,000 for the ranch. $1,000,000 was paid to the unitrust for half the ranch, and $1,000,000 was paid to the revocable trust for the balance of the sale price.

Since there was no binding contract for sale prior to funding the unitrust, Mac and Glenda received both capital gains bypass and a large charitable deduction. They received a $424,000 charitable deduction and saved $135,000 in capital gains tax. They can take over $300,000 of the deduction to offset taxes this year on the $1,000,000 sale, and the balance of the charitable deduction will save taxes for the next five years. Overall, the tax savings will offset the capital gains tax payable on the $1,000,000 paid to the revocable trust. After the sale, Mac withdrew $200,000 from the revocable trust to pay back the bridge loan.

With $800,000 in the revocable trust, Glenda and Mac left for a wonderful vacation. They were last seen smiling in the front row of the top show in Branson, Missouri.

Published June 11, 2021
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