Jim Vardaman developed the concept of buying PPICs as investments and never
gave a thought to its use for estate planning until this idea was suggested
by Mike Bartlett, a Prudential Securities broker who frequently joins his
lunch group. The same week the landowner who sold him a PPIC on a Conservation
Reserve Program (CRP) plantation called to describe how he, on the other
side of the trade, uses a PPIC for estate planning. You may find these two
ideas helpful.
Vardaman, the PPIC buyer, will soon be 76. If he died the day after he had
bought a PPIC on a freshly-planted stand, his heirs would inherit an asset:
his interest in the timber that would be produced eventually by little trees
that are mere tufts of green needles about 12 inches tall. Heirs would also
inherit a liability: his annual obligation to furnish on-the-ground inspections
and to pay the landowner so much per acre, regardless of whether the heirs
are ever able to sell the trees. This obligation is often substantial; it
is spelled out in the contract and may amount to $25 to $100 per acre for
perhaps as long as 23 years.
Vardaman believes that the tax liability of his heirs would be based on
the fair market value of both the asset and the liability as determined
by a qualified appraiser. He also believes that, since PPICs are so new
and therefore completely unfamiliar to almost everyone, the asset, the little
trees, would be appraised at no more than $100 per acre. On the other hand,
the clearcut liability would be appraised at perhaps $400- $500 per acre.
Consequently, his total estate would be reduced by his PPICs.
The landowner is 68, receives better than $40/acre/year from CRP, and is
also building a large value per acre as his trees grow. When he sold the
PPIC, they were eight years old; some were already merchantable, and the
forest was impressive. He decided to sell a 15-year PPIC at $100/acre/year,
pay the tax owed on his gain from these annual sales to Vardaman, and give
the remainder to his heirs. His estate would be reduced by the payments
he has received. He is in good health and hopes to live long enough to complete
the job.
Neither Vardaman nor the landowner would dream of taking tax advice from
a forester, and we never attempt to offer it. We merely pass along these
ideas to you. We think that this important decision definitely requires
advice from your tax advisor.
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