His grandfather bought the ranch in 1921. Two sections of land in west Texas. The kind of place Elmer Kelton wrote about in his classic novel, The Time It Never Rained. Cold cactus-shadow sun rises, picturesque sunsets and the stars at night are truly big and bright. No brag, just fact.
When his father passed, it fell on John, as he describes it, to care for the ranch. He spoke of himself as a steward of the land, but in stark reality, he was the owner of the ranch. With ownership comes responsibility. John never shirked responsibility.
Among other occupations, John became a west Texas rancher. His children were raised knowing which side to mount and how to string barbed wire. John’s wife died too soon. The kids found their own interests and gradually moved further from their roots. Along the way, John preserved the land and the ranch was good to him.
John knew that he had no heirs willing nor able to take over the ranching duties and look after the land. He knew that someday he could no longer ride the fence. He knew it would “fall to him” to structure the sale of his third generation ranch. “For the thing I greatly feared has come upon me,” John quipped.
Three months after the “For Sale” sign was wired to the front gate, an offer came for $4 million. The buyers wanted one section. It created an opportunity and a dilemma.
At 84 years old, the opportunity to “downsize” to only 640 acres would allow John to finally slow down a little and spend more time with his loved ones. With no heirs to take over the family ranching business (his children did not want to be ranchers), the responsibility of selling was made manifest. The process of wealth transfer and legacy planning had begun and John did not shrink from this responsibility either.
In August of 2017, the investment firm of Charles Schwab conducted a survey1 of savers and investors (ages 25-70), more than half (57%) said they had spent five hours or more doing research the last time they bought a car, and 44% said they spent more than five hours exploring vacation possibilities. However, only 20% confessed to spending that much time reviewing their investments.
Legacy planning requires time. Most importantly, the process requires thought.
John decided, early on, that the sale of this particular section of land required much thought. Time, however, was not on his side. The buyers were structuring their financing and his ranch real estate agent was searching for a qualified intermediary. The math was simple, cowboy arithmetic. Tax on the sale was too large of a number to ignore. It made good, west Texas sense to complete a 1031 exchange.
Forty-five days is a short period of time to search for replacement property which satisfies the IRS. It is, nonetheless, non-negotiable. From the close of the sale to the end of the identification period, the IRS allows 45 days. No “barkin’ at a knot,” according to John. No time off for weekends. No time off for holidays.
“What’s important to you about this land sale?,” we asked.
He replied with a list of goals:
1. Keep the section with the old homestead ranch house
2. Pay no taxes
3. Potential monthly income
This is a condensed version of our conversations. If we strayed from the main goal, we would ask again, “What are we trying to get done here, John?” We met a few more times during the 45-day identification (ID) period to nail down his goals and create a plan.
Research is critical to the solution of creating a replacement portfolio. Reviewing several DSTs which met John’s strategy of conservative investing was our job. Culling the herd was John’s job. We answered his questions and he quickly sorted through the selections.
We sought and found two Delaware Statutory Trusts into which he could exchange the proceeds from the ranch sale. They held different kinds of properties in different parts of the country. Multiple DSTs meant diversification. Diversification meant “not having all his eggs in one basket.” Diversification helps manage investment risk within an investor’s portfolio. As a cattle rancher, John grasped this concept quickly. The securitized real estate in each trust seeks monthly income. The monthly income potential gave him the needed capital for “fence mending” on the remaining section of the home place. By the way, he deferred over $1,000,000 in taxes.
If the devil is in the details, then the paperwork certainly removes all hidden elements of those details. It is, after all, a real estate closing. “Sign here, initial there,” we say as we read and discuss each page. There is no escaping the forms, documents and agreements printed for the closing. The good news is that DST transactions typically take less than one week to close. This fits nicely into the 45-day ID period.
Today, John calls to let us know that he is happy with the decision to work with us, as it fit his situation well.
When it is time for John to go to his heavenly reward, his two non-rancher children will inherit the DSTs at a step-up in cost basis. They will continue to receive potential monthly income for as long as they own the trusts and be able to exchange their respective ownership by utilizing IRC Section 1031…just like their dad taught them. What a great legacy.
The client example provided is for illustration purposes only and does not guarantee the same outcome for all. Individual results may vary depending upon their siltation. Past performance is not a guarantee of future results. Names have been changed in this example.