Biden may remove ‘death tax’ exemption
After less than a month in office, President Biden has managed to bring numerous changes to the table that will have a significant impact on agriculture. One notable change, if passed, is Biden’s proposed tax plan.
This plan could cause business operators significant hardship in transferring an agricultural operation or business from one generation to the next and it also has the potential to do away with policies that have promoted a profitable environment for farmers and ranchers in recent years.
Biden has yet to make a formal proposal, but throughout his campaign he made clear certain changes he would like to see with tax policy. Since the Democrats have control of both the House and Senate for the next two years, it appears some of Biden’s tax proposals could become a reality.
According to tax foundation, some of the policy changes President Biden has supported that will ultimately impact agriculture include reducing the estate tax exemption, doing away with step-up basis, increasing long-term capital gains tax and taxing an asset’s unrealized appreciation at transfer whether an heir decides to sell the asset or not.
Biden’s tax proposal calls for reducing the estate tax exemption amount all the way back to $3.5 million per person, immediately or retroactively to January 1, 2021. Biden has also suggested increasing the estate tax rate from 40 percent to 45 percent.
Federal estate tax is a tax on ones right to transfer property at death. As it stands today, there is no federal estate tax due if an estate is worth less than $11.7 million when an individual passes away. A married couple can double that amount (up to $23.4 million) and owe no estate tax. The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, will expire after 2025, according to the IRS. This will cause the federal estate tax exclusion to drop back to the pre-2018 level of $5 million, adjusted for inflation.
“It’s the family operations that will be impacted because any of the large corporate operations will just be passed along. Someone like Bill Gates who has big money and piles of attorneys to take care of any tax issues won’t be impacted,” said fifth generation rancher, Brett Crosby of Cowley, Wyoming. “It’s the mom and pop operations or even the larger family operations that are supporting multiple families will be the ones getting hammered.”
The suggested decrease in the estate tax exclusion coupled with high land values, will likely cause many farmers and ranchers to be subject to federal estate tax. Alissa Baier, attorney with Galyen Boettcher Baier PC, LLO, a law firm with locations in O’Neill, Norfolk, and Laurel, Nebraska, explains how it will take very few acres to surpass the estate tax exclusion. “Based on the average value of Nebraska irrigated cropland of $6,125 per acre, it would take approximately 572 acres of irrigated cropland in Nebraska to exceed the proposed $3.5 million exemption. That doesn’t include the value of any machinery, equipment, grain, or house, which would all increase the size of the estate.”
Another piece of Biden’s plan is to do away with stepped-up basis at death, according to Tax Foundation. Step-up basis reduces capital gains tax liability on property passed to an heir by excluding any appreciation in the property’s value that occurred during the decedent’s lifetime from taxation. Under today’s law, the basis of inherited assets increases to fair market value when the decedent passes away. For the heir, this is extremely beneficial since there is no income tax on capital gains if the heir chooses to directly sell the inherited real estate, grain, equipment or other property. “Step-up in basis effectively eliminates income tax on any unrealized gain accrued by the decedent. Inherited equipment and machinery retained by the heir can be depreciated all over again,” stated Baier.
According to the IRS, currently, capital gains from the sale of either property or an investment are taxed at a preferential rate that can be as low as 15 percent. Biden’s plan proposes increasing the long-term capital gains tax to 39.6 percent for certain households, the largest increase in capital gains tax in all of history, according to Tax Foundation. This change would drastically increase the expense of selling land.
Crosby feels that stepped-up basis is helpful, but in most cases, when a rancher or farmer sells their operation, they usually turn around and buy something else, most likely utilizing a 10/31 exchange of some sort. With that being said, Crosby does think that this is a poorly constructed policy because it provides incentive for people to hold onto land instead of selling. “Eliminating step-up basis makes less real estate available for young operators looking to buy land. Additionally, less real estate being available will push land values higher, which will make it even more expensive for young farmers and ranchers to buy real estate,” said Crosby.
Crosby went on to say that even though an operation is multigenerational, there is still a good chance that they are paying on some type of mortgage. Whatever that mortgage may be, if the government tacks on increased capital gains tax, that’s when you’ll start to see operations sink. “Farmers and ranchers are trying to make a living without selling out because they’ve been around for multiple generations and this is what they do. They look wealthy on paper, but they don’t live wealthy, there is a huge difference and many don’t understand that.”
To make matters worse, Biden has said he supports taxing an asset’s unrealized appreciation at transfer whether an heir sells the asset or chooses not to, but Baier believes this isn’t likely, along with getting rid of step-up basis. “The Tax Reform Act of 1976 would have eliminated the stepped-up basis rule, but the provision was repealed before it could ever take effect since determining the cost basis of property was difficult,” said Baier.
With these pending tax proposals looming, Baier recommends contacting an estate planning attorney as soon as possible to discuss succession planning options and any changes that need to be made to a person’s existing estate plan. “Depending on your situation, there may be ways to mitigate the effects of Biden’s proposals when transferring your farm or ranch to the next generation,” she said. It is also important to remember that tax policies are always subject to change with future administrations.
According to Baier, one estate planning option to reduce your exposure to estate tax is utilizing your high exemption amount of $11.7 million by making large gifts. “The IRS has confirmed that if the estate tax limit is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered in and no tax would be due on them. If the high exemption isn’t used, it may be lost.”
Another option would be to use the annual gift tax exclusion, which allows a person to give any number of people up to $15,000 each in a single year without incurring a taxable gift or using any estate tax exemption.
Under the Biden administration, current tax policies are subject to major changes. “If passed, these tax proposals will be extremely detrimental when passing the farm or ranch legacy to the next generation. Almost all farm and ranch operations will be impacted by the massive consequences of Biden’s tax policy. Heirs will be faced with having to sell part of the farm or ranch in order to pay these proposed taxes,” said Baier.
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