It’s common for farms and ranches to be family-owned. Unfortunately, it’s also common for owners to let estate planning fall by the wayside, causing family members to lose out on tax-saving opportunities. Be sure to set aside some time to consider your estate plan.
If you haven’t recently reviewed your plans for transferring wealth and management responsibilities to the next generation, now is the time to do so. To get the most out of your estate plan, you’ll want to be aware of the latest tax rates and exemptions and takes note of strategies that may be useful when transferring wealth and management responsibilities to the next generation.
Most estate rates and exemptions remain unchanged for 2017.
However, with higher estate exemption amounts, income taxes on a potential sale of your farm could be your highest tax.
The top gift and estate tax rate is 40%. The American Taxpayer Relief Act of 2012 (ATRA) also permanently sets the gift and estate tax exemption at an annually inflation-adjusted $5 million. For 2017, it’s $5.49 million. As a farmer, you can transfer up to that amount tax-free to your heirs while you’re alive and bequeath any remaining exemption tax-free upon your death.
The same tax rate and exemption amount apply to the generation-skipping transfer (GST) tax. Generally, this tax is assessed — in addition to the gift or estate tax — on transfers to grandchildren and others more than one generation below you.
The annual gift exclusion remains unchanged at $14,000 per donor and recipient in 2017. This means a married couple can gift up to $56,000 to their son and daughter-in-law ($28,000 combined times two recipients) tax-free without using up any of their gift and estate tax exemption.
But what if your family does not want to continue farming? There is now a trade-off between estate taxes reduced by gifting or the potential income taxes on the eventual sale of the farm. Assets gifted before death do not receive a higher tax basis on your passing. Assets held until death do receive a new, higher tax basis equal to the fair market value, thus reducing the capital gains tax on a potential sale. If your family does not plan on continuing farming, a comparison of the potential estate taxes and income taxes should be prepared as part of your overall estate planning.
You have options for your farm transition plan.
Some family farm owners aren’t ready to hand over the reins to their heirs just yet. They want time to groom the next generation to run the show. Various estate planning tools, such as family limited partnerships and certain trusts, help balance the transfer of wealth with the retention of managerial control.
Before you can decide which estate planning tools to use, however, you need to know how much your farm is worth. Minority interests in small to midsize farms may be subject to discounts for lack of control and marketability that only a qualified business appraiser knows how to quantify and support. Farm land prices have been steadily increasing so you’ll need regularly updated business appraisals to ensure your estate plan continues to make sense.
A financial plan may also be in order to ensure you keep enough assets to support you in your retirement years.
Don’t wait until next year.
Farm and ranch owners who neglect estate planning risk leaving behind a significant tax bill when they die. Because the income tax is the new estate tax, a comparison of these potential taxes should be run based on your individual numbers. Your farm is probably your biggest asset. Protect it — and your loved ones — by contacting Aldrich about estate and income tax planning today.
This post was originally published on December 31, 2015. It was updated on August 24, 2017 to provide you the most current information.
Meet the Author
Joanne Humphrey, CPA, PFS
Aldrich Wealth LP
Joanne Humphrey has more than 30 years of experience providing business advisory and tax services for business owners with special expertise in dental and medical practices. This includes complex tax preparation and planning, trust and estate planning, retirement planning and financial planning for small and large practices. Joanne specializes in analysis of retirement plan design,…
- Wealth management
- Personal Financial Specialist
- Certified Public Accountant
- Tax compliance and strategic tax planning
- Preparation, analysis, and review retirement plan returns and investment reports