What was Jim’s situation?

Jim was a successful dairy farmer in Washington. He had:

• 1,000 dairy cows worth about $3 million

• $3 million in dairy equipment (tractors, silos, milking parlors, etc.)

• A farm he later sold for $7 million (originally purchased for $1 million)

After decades of hard work, Jim was ready to retire and focus on his family. But selling meant facing a tax cliff that could have wiped out nearly $4 million of his wealth in one shot.

What is the tax basis of dairy cows?

This is where many farmers are caught off guard.

• Purchased cows: fully depreciated over time → basis $0.

• Raised cows: costs deducted annually → basis $0.

Jim’s 1,000 cows, worth $3M, had a $0 basis.

• Sale triggered $3M of depreciation recapture, taxed at his 37% bracket = $1.11M.

His $3M of equipment was also fully depreciated, triggering another $1.11M.

Total recapture liability without planning: $2.22M.

How did the Charitable Remainder Unitrust (CRUT) help?

Jim transferred his herd and equipment into a Charitable Remainder Unitrust (CRUT).

• The CRUT sold the assets without immediate tax.

• Entire $6M corpus reinvested.

• Jim receives 5% annually = $300,000/year of potential income.

• Taxes only due on distributions.

• At least 10% ($600,000+) will go to charity when the trust ends.

But Jim went further: he set up a family foundation to receive those charitable funds. That way, his children—not the IRS—will decide which causes to support. It becomes a family mission, preserving unity and ensuring they gather to make giving decisions long after Jim is gone.

What happened with the farm sale?

Jim then sold his farm for $7M (with a $1M basis, creating $6M of gain). Normally, this would mean another $1.7M–$2.2M tax bill.

Instead, he reinvested the full $7M into a Delaware Statutory Trust (DST) through a 1031 exchange.

• Result: 100% tax deferral at the time of sale.

• DST units are fractional, so each of Jim’s children will inherit their own separate shares in the trust. That means no family conflict over “who owns what.” Each heir manages their portion independently, with a step-up in basis at inheritance—eliminating deferred tax liability.

How much potential income could Jim receive?

• From the CRUT: $6M × 5% = $300,000/year of potential income.

• From the DST: $7M × 5% ≈ $350,000/year of potential income.

Together, that’s about $650,000/year of potential retirement income—all while deferring nearly $4M in upfront taxes.

How much did Jim defer in taxes?

AssetValueNormal Tax LiabilityStrategyOutcome1,000 cows$3M$1.11M recaptureCRUTDeferredEquipment$3M$1.11M recaptureCRUTDeferredFarm$7M$1.7M–$2.2MDSTDeferredTotals$13M$3.9M–$4.4MCRUT + DSTDeferred

What can other farmers and ranchers learn?

• Know your basis. Most cattle and equipment have $0 basis—meaning sales may trigger taxes at ordinary income rates.

• A CRUT can defer depreciation recapture. It allows sales inside the trust, deferring taxes and creating potential income distributions over time.

• A DST can defer land sale taxes. It preserves capital and creates potential passive income.

• Think family legacy. Jim’s CRUT remainder will go into a family foundation his kids control, and his DST units pass down as separate shares, ensuring fairness and harmony.

The bottom line for Jim

By combining a CRUT and a DST, Jim:

• Deferred nearly $4 million of immediate taxes

• Created about $650,000/year of potential retirement income

• Ensured at least $600,000 will fund his family foundation

• Passed DST shares to his heirs individually, with a step-up in basis

⚠️ Disclosure: In the interest of protecting the client, real names and exact numbers were not used. However, the concept of what happened is accurately reflected in this case study. This is a hypothetical illustration based on a real scenario. Results may vary. This is not an offer to buy or sell securities. Potential cash flows, distributions, and income are not guaranteed and may vary. Investors should consult with their own tax, legal, and accounting advisors before making any investment decision.