What the STEP Act might mean for agriculture and estate planning
Myron Friesen looks at some of the possible repercussions of the STEP Act on agriculture.
Do you remember hearing some sayings as a kid and you really didn’t know what they meant and then later in life you figured it out? Right now I’m thinking, “Don’t bite the hand that feeds you.”
By now, many of you have heard of some of the proposed tax law changes and, most recently, the proposal called the STEP Act. If you were in the classroom with me, I would ask you to raise your hands if you’ve heard of it, and most hands would go up. Then I would ask, how many of you could tell me what the letters S.T.E.P. stand for? Not many hands would go up.
STEP stands for Sensible Taxation and Equity Promotion . Sensible is not what comes to my mind, and when I hear the word "equity," I think "redistribution of wealth." Clearly the drafters of the STEP Act are completely out of touch with agriculture.
I will start with a slight disclosure that recognizes these are proposals and not law yet, so hopefully these things do not all come to fruition. So what are the chances this new proposal is implemented? If this required 60 votes, there would be no chance. If it requires 50 votes, hopefully there are some Democrats from agriculture-based states who are sensible enough not to vote for this. There seems to be a group that has a serious animosity toward anyone with perceived wealth.
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Here is a quick review. On federal estate taxes, the limit is currently $11.7 million. The current law is scheduled to sunset to about $5.85 million in 2026. The new proposal sets the sun now all the way down to $3.5 million right in the face of inflating asset values, including real estate!
Let’s talk about new taxes in the STEP proposal, starting with stepped-up basis. Here’s a quick example: Let’s say you own 800 acres valued at $10,000 per acre, or a total land value of $8 million, plus you rent some ground and therefore, have $2 million of equipment. Your grain and other assets add another $2 million, for a total estate of $12 million. Between you and your spouse, $1 million each would be exempt and the other $10 million would be subject to a “transfer tax.” The basis in your equipment is probably $0 because you’ve depreciated it already, so now at a death, rather than re-depreciating $2 million with stepped up basis, your estate would have to pay 40% re-capture tax on the $2 million, which would be $800,000 of tax for the privilege of keeping the machinery you already paid for once. Not Sensible!
Then let’s say the average basis in your land was $3,000/acre and the value at your death is $10,000/acre. Now your estate would have $7,000 per acre of gain at a new capital gain rate of 30%, which would result in $2,100 per acre capital gains tax on 800 acres or another $1.6 million of capital gains tax on your land. That’s $2.4 million of new tax. Not sensible!
Of course, they’re being super gracious by saying the new tax can be deducted from your estate value, which would get your estate down to about $8 million, which would be still be $1 million over a proposed estate tax limit of $7 million ($3.5 million x 2) so there would be another $400,000 of federal estate tax, not to mention your state estate tax depending on where you live. Not sensible!
Add all three taxes and there is $2.8 million of tax for an estate that had no tax in previous years. Clearly some of these decisionmakers do not understand the reason we have a very abundant food supply and the lowest food prices in the world. The current laws and limits are generally working. Farmers are great for the economy because most continue to live within their means, and when we make money we spend in back on the farm. Why cut off the hands that are feeding them? Not sensible!
The kicker to this proposal is that it taxes gifting above a low limit. No worries, they’ll be kind enough to let you gift it as long as you pay the tax on it as if you sold it. Quickly you will recognize this is an assault on prosperity of the hands feeding our country, not to mention all the other concerning things that have already been executively signed.
Sometime the new rulebook will be announced, hopefully leaving things closer to the current laws than the proposed changes, and then estate plans will be adjusted accordingly. As I mentioned in a previous column, now is not the time to make a radical decision that could come back to haunt you , but it’s a great time to review how you want your farm distributed and be ready to adjust to the tax implications as soon as we know the rules.
My words for their proposal is Senseless Taxes Ending Prosperity! That would be a bad S.T.E.P.
Myron Friesen is the co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be contacted at 866-524-3636 or firstname.lastname@example.org.