Uncertainty can bring anxiety because the unknown is hard to plan for and we don’t know if trouble is lurking. With farm estate planning, about the last 10 years have been relatively stable with the federal estate tax limit generally increasing, stepped up basis rules remaining the same and other tax laws generally becoming more favorable. However, based on what has been outlined on the campaign trail by the democratic candidates, things are about to change and it certainly appears that a number of the changes could affect farm families adversely.
At this point, the unknown is wondering which of those proposals will actually become law and when they will become effective. Usually I don’t like to spend a lot of time on things we don’t know for sure and we cannot control, but I will mention a few of those things for now because many people are asking.
The federal estate tax limit: There have been proposals about reducing the federal estate tax limit from what would be $11.7 million per person for 2021 back to $5.85 million per person, which would represent reverting to the pre-Trump estate tax limit. Basically the federal estate tax limit would be cut in half. So married couples with an estate valued over about $11.7 million could have a federal estate tax problem. With rising land values, combined with strong equipment and grain values, this could propel many estates back into having a federal estate tax problem at a 40% rate.
Stepped-up basis: Stepped-up basis for farm families has long been a valuable tool when land, machinery, grain and livestock all get a new basis at a death. This has allowed the surviving spouse or children to re-depreciate those assets or sell them without tax. Now it seems as though there are two possible ways stepped-up basis may get changed.
The first proposal would be to eliminate stepped-up basis entirely, which initially would not be a taxable event, but it would eliminate the re-depreciation that is very valuable, and it could trigger a significant tax when an asset is sold.
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The second version of the proposal is that there would still be stepped-up basis, but the estate of the decedent would have to pay for the stepped-up basis prior to the estate being distributed. This would represent an immediate tax to the estate and could apply to all assets, starting on the first dollar. For example, if you had land with $1,000/acre basis and now it is worth $9,000 per acre, there is $8,000 per acre of gain. If capital gain rates are 30%, that would mean you would have to pay $2,400/acre of capital gains tax prior to estate distribution. It would be as if you sold the asset, even if you didn’t sell it and were just transferring it from one generation to the next. That could be very painful for every farm.
Capital gains tax: Speaking of capital gains tax, the proposals include increasing that rate to nearly what the income tax rates are. That could hurt when combined with stepped-up basis changes.
It seems as though these three tax law changes may be the ones that affect farm families the most. Of these three, the stepped-up basis could be the one that hurts the most, followed by the lowering of the estate tax limit, and finally, the capital gains rate change. These three changes could stack up and be double and triple whammies!
How soon will these changes become effective and could they be retro-active? That’s a good question, but I fear changes could come sooner rather than later, since it appears as though some of the political checks and balances in the system are no longer in play. Stay alert to how changes could affect your farm. Go to https://www.farmestategps.com to sign up for next free seminar Monday, Feb. 8.
Myron Friesen is the co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be contacted at 866-524-3636 or friesen@farmestate.com.
