As the Biden administration’s inevitable changes to the tax policy take shape, one thing remains constant: agriculture is under attack.
The House Ways and Means Committee, which has jurisdiction over taxation, released draft legislation on September 13, 2021. As written, the proposed legislation would lower the amount that a person can transfer by gift or through an estate before incurring taxes, a change that will disproportionately impact agriculture.
Currently, a person may transfer a total of $11.7 million by gift or through their estate essentially tax-free and any amount above that is taxed by the federal government. This amount was raised by the 2017 Tax Cuts and Jobs Act and is set to sunset in 2026, meaning that the exemption level would revert to $5 million per person, adjusted for inflation to about $6 million per person. The currently proposed legislation, however, would move the date of the reduction up to January 1, 2022. The tax on the portion of an inherited farm or ranch estate that is over the exemption level is 40% and must be paid within 9 months of death.
Although this amount is often discussed simply in terms of estate taxes, it also includes any gifts above the annual gift exemption. Currently, a person may annually gift $15,000 each to an unlimited number of recipients without being taxed. Any amount above that uses up part of the lifetime exemption. For example, a gift of $20,000 to a person in a single year will diminish the total lifetime gift and estate tax exemption by $5,000.
While these numbers may seem high at first glance, especially for those familiar with the low liquidity of agriculture operations, they include the value of land and other non-liquid assets such as equipment. In other words, this amount includes the total value of a farm or ranch, not just the money in the bank. Generally, the most valuable asset of a farm or ranch is the land itself, which typically continues to appreciate over time. In many parts of the country, hot real estate markets are inflating the price of land to a point that a lowered exemption level is likely to trigger gift and estate taxes upon transfer through gift or inheritance.
Another major concern for agriculture under this administration is a change to step up in basis, and advocates for agriculture throughout the country collectively breathed a sigh of relief when the proposed legislation did not contain such a change. The proposed legislation is still subject to multiple rounds of debate and revision, so the threat of a change to step up in basis is by no means gone.
“Step up in basis” means that when property is passed at death, its value is adjusted to the current fair market value. When a property is sold, the owner is taxed on the difference between the current market value and their “basis” in the property, meaning the value of the property at the time they acquired it. This difference is referred to as a capital gain or loss, which is then federally taxed. A step up in basis reduces the capital gains realized by the inheriting generation because the calculation is based on the appreciation of the land during their ownership rather than since the original family purchase. Since land typically appreciates over time, an elimination of or tax on step up in basis would disproportionately impact generational transfers in agriculture.
Despite the proposed legislation not including this change, it is not completely off the table. The proposed legislation is not set in stone yet and such a change may easily be added back through the extensive revision process prior to congressional approval. Additionally, Biden’s “American Families Plan” released on April 28, 2021, support limitations on the existing step up in basis.
Although the current elimination of changes to step up in basis are a move in the right direction, changes negatively impacting the generational transfer of farms and ranches are inevitable under the current administration. Estate taxes can bankrupt an operation, so farmers and ranchers need to reassess their estate plans to protect their operations for future generations. Hopefully, our country will realize the disastrous implications of taxing agriculture out of business before it is too late. In the meantime, estate planning is one of the most powerful tools we can use to keep the industry alive for the next generation.
Katherine E. Merck is an Associate Attorney with Budd-Falen Law Offices, LLC with a primary focus on property rights, environmental, and natural resources law. Budd-Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Texas, and Wyoming. This article should not be understood to state or imply that any lawyers of this law firm are certified as specialists in a particular field of law. Colorado does not certify lawyers as specialists in any field. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer's credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This article is informational and is not legal advice. Use of this article or contact with this law firm does not create an attorney-client relationship.
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