There has been a lot of commotion in the gifting arena recently. Gifting is something to consider when moving farm assets from one generation to another. Particularly land if the intention is to keep it in the farming operation indefinitely. Timing may be of the essence when it comes to gifting decisions and getting the best benefit from it. The expiration of current tax law and the appetite of current and future congress to change the current law earlier than expected makes this consideration come front and center for planners. The following is a summary of the mechanics of this planning option.
Who does this impact?
This impacts owners who desire their operation be passed to the next operator. Farmers have many dynamics to deal with when making succession decisions. If planning points to a logical farm successor, the current owner knows the survival of the operation may mean gifting assets to the successor to allow for adequate capital to continue the operation. Gifting, as opposed to selling or waiting for the land to pass through an estate, might be a planning tool to utilize to assure the farm legacy survives.
How does it work?
- Each person is currently allowed a lifetime estate and gift exemption of $11.4 million. A couple has twice that. This means nearly $23 million can pass through you and your spouse’s estate or be gifted by you during your lifetimes with no estate or gift tax consequences. This number can be even higher with allowed discounting of values of assets placed in separate entities. Discounting is a discussion item for your tax professional.
- It works best to gift assets that are not intended to be sold and cannot be depreciated. The receiver keeps the tax basis of the giver. Example: land costing $1,000 an acre when purchased is worth $10,000 now. Selling would result in a $9,000 an acre gain if sold by the owner or the one it is gifted to. Ouch! Equipment and grain are normally not good items to gift because tax basis is often $0 for both the giver and the receiver resulting in 100% gain upon sale. Another ouch and one surely to be realized quickly for grain and in the foreseeable future for equipment!
- Clarity on item b is important because a very different result occurs when assets pass through an estate. The land above would have a new basis of $10,000 an acre and no gain on an immediate sale. Equipment and grain also get a new basis to their current fair value. Depreciation starts over on the equipment.
- Gifting is not deductible to the giver.
What is the commotion?
The $11.4 million exemption per person is to expire in 2025 in current tax law. For 2026, it may revert to half of $11.4 million resulting in estate and/or gift tax at lower estate values. Five years seems like plenty of time to make plans, but there is concern surrounding a proposed bill in the House that will lessen the five years to three. Finalizing a plan takes time; most plans begin many years before the transition is made. The political environment is rocky and several Presidential candidates want to make changes even sooner.
Why act now?
Estate and gift tax can be as high as 40%! If your goal is to leave a legacy in agriculture, start now. Timing of those decisions is highly important as the law can change drastically and quickly, resulting in dollars going to the IRS that your successor and/or other heirs could be receiving.
Above is a basic explanation of gifting. There are many moving parts leading to these types of large decisions. Planning is hard and often postponed or completely avoided. Could the discussion of saving tax dollars through gifting help the family understand how this strategy could be a piece of the overall plan? Maybe.
Conclusion: Save tax dollars, get ownership to the next operator(s) sooner, get value to other heirs sooner, and help ensure a better chance of family understanding and unity.
Gifting over $15,000 to one person a year requires a reporting to the IRS. There are no tax consequences until total accumulated gifting is over the $11.4 million exemption.
We’re here at TDT CPAs and Advisors to help you understand your planning options. Please don’t wait on this discussion if it looks like something you need more information on.