If you’ve farmed for thirty or forty years, you already know that the last few years before you hang it up can be the most punishing at tax time. The grain bins are full. The prepaid fertilizer and seed have finally caught up with you. The cull cows are going to town. Your accountant calls in November and tells you that this year’s tax bill could be the biggest one you’ve ever seen — sometimes a half million dollars or more on a single return.

Two tools can soften that final crop year in a serious way. Most farmers haven’t heard of either, because they live mostly in the world of doctors, dentists, and small business owners. But they fit a retiring farm operation about as well as any tax planning idea out there. The first is a cash balance plan. The second is a charitable remainder trust. Used together or sometimes one or the other they can keep hundreds of thousands of dollars in your pocket that would otherwise have walked out the door.

Cash Balance Plans: A Big Pension You Build for Yourself

A cash balance plan is a kind of retirement plan you set up for your farm business. Most farmers know an IRA or a SEP-IRA — those let you sock away maybe $8,000 or $72,000 a year. Useful, but not nearly enough to soak up the income from a final crop sale or a herd liquidation.

A cash balance plan plays in a different league entirely. The amount you can put in goes up as you get older, because the rules behind these plans assume you have fewer years left to save. A 35-year-old might put in around $113,000 a year. A 56-year-old can put in about $324,000. A farmer between ages 60 and 63 can put into the plan roughly $395,000 to $436,000 a year and stacking a regular 401(k) on top pushes the combined number over $500,000. Every dollar comes off your taxable income.

Here’s what that means in real numbers. Take a 56-year-old grain farmer with a couple million dollars of grain and prepaid expenses to work through over her last six years of farming. She averages $380,000 a year in farm income during the wind-down. A cash balance plan lets her shelter about $324,000 a year. She still pays self-employment tax, and she has to put in around $2,400 a year for her one full-time hired hand.

It is important to understand, once you start, you have to put money in every year, not just the high-income years. This is a tool for farmers who can see five or more good income years ahead, not someone facing one unexpected windfall. We typically see this works well for farmers with no operating debt and can time extra grain sales each year to soak up the pension contribution. There is a lifetime limit of about $3.6 million that can be put into these plans for one person.

This does not eliminate the tax since you will need to start taking required distributions at age 75 (required age for those born in 1960 or later), but this allows for deferral over your lifetime at likely lower tax rates.

There’s also a side benefit most folks don’t think about until trouble comes. Money inside a cash balance plan is almost completely safe from creditors. If a chemical drift lawsuit goes against you, or you end up filing bankruptcy, the plan is one of the few places creditors generally cannot reach. That protection kicks in the day the money goes in.

Charitable Remainder Trusts: Sell the Crop Without Selling It

The second tool works on a different problem. Say you’ve got $1 million of unsold grain sitting in the bin at retirement. If you just sell it, you owe federal income tax, state income tax, and self-employment tax on the whole amount — easily 45 cents on the dollar gone. On $1 million, that’s $450,000 to the government, leaving $550,000 to invest.

A charitable remainder trust changes that math. You set up an irrevocable trust and donate the grain to it before it’s sold. The trust then sells the grain and because it’s set up under a special section of the tax code, no tax is owed on the sale. The full $1 million stays invested. The trust pays you an income each year, either a fixed dollar amount or a fixed percentage of the trust’s value, for either a set number of years (up to twenty) or for the rest of your life. When the trust ends, whatever’s left goes to a charity you name.

Compare the two paths. Sell outright, invest the $550,000 left over at 6 percent, and you collect $33,000 a year. Donate the grain to the trust, invest the full $1 million at 6 percent, and you collect $60,000 a year which is nearly double. You still pay regular income tax on the trust payments, but you skip self-employment tax entirely, and you spread the income across many years instead of getting hammered all in one.

Some farmers worry about the part where the leftover money goes to charity instead of to the kids. Fair concern. The common workaround: use some of the extra annual income to buy a life insurance policy in a separate trust for your children. The insurance proceeds replace the asset for the family. Charity gets the leftover, the kids get the insurance, and you’ve kept everyone whole while saving on income taxes.

These trusts work especially well for farm assets hit by self-employment tax — raised grain, raised livestock, and the like. They’re less of a slam dunk for things taxed at lower capital-gains rates, like land you’ve owned for decades. But for the right farmer with the right assets, the difference between selling outright and using a trust can run into hundreds of thousands of dollars.

The Bottom Line

Neither tool is a do-it-yourself project. Both require an accountant or tax attorney who has actually set them up before and certainly ideally one who has worked with farmers, because the rules around grain inventory, raised livestock, and self-employment tax don’t always show up in the city-doctor textbooks. Setup costs a few thousand dollars, and there are filing requirements every year. But if you’re sitting on a big income year or several of them and you don’t have a plan beyond writing a giant check to the government, it’s worth a conversation with a planner who knows this territory. The math works, and there’s no reason farmers shouldn’t be at the front of the line.