Vanessa Bechtel Discusses How Political Changes May Impact Succession Planning
Even if the Senate does not change from Republican control, there is still a strong chance that certain changes may be made to estate taxes to help fund the stimulus spending. Some of those change could be as follows.
Reduction in the Lifetime Exemption Amount – Currently, each person can have an estate of almost $12 million and owe no estate tax. A couple can have up to $24 million and not owe any federal estate tax. These higher levels will continue through 2025 and revert back to the old approximate $6 million level in 2026.
Joe Biden has already proposed reducing this amount back to old levels immediately and many in Congress would like to see it reduced even further.
Elimination of Step-Up in Basis – Assets inherited are allowed to be stepped-up to fair market value. This is especially helpful in farming since most farm assets have no tax cost basis at death. For example, assume a farmer owns $2 million of grain, $1 million of cost of growing crop and $3 million of farm equipment at death. Under current law, the heirs are allowed to step-up these values to $6 million. The grain can be sold tax-free; the cost of growing crop is allowed as a deduction; and the farm equipment can then be depreciated all over again.
Joe Biden proposes eliminating the ability to step-up assets at death. This has been tried before (about 40 years ago) and was quickly rejected since determining the cost basis of items was very difficult. However, almost all financial assets are now tracked by the brokerage company so it would be easier to implement this change.
Capital Gains Tax at Death – Canada has a system of taxing all appreciated assets when someone passes away. There are certain exemptions for assets to spouses, etc. but the final income tax return will tax all appreciated property held at death.
Since the asset has been taxed, the heirs will receive a step-up in basis, however, the tax is due immediately. The elimination of the step-up in basis could be more favorable since that tax is not owed until the asset is sold.
Conclusion – As you can see, major changes may be imminent regarding estate taxes. If your net worth is in the $20-40 million range (as a couple) and most of the value is farm land, you need to meet with your estate tax professional immediately to determine what steps you should take.
Remember, if the goal is to keep farmland in the family for at least a few generations, a step-up in value on farmland is not as important since we can’t depreciate farmland and if it will not be sold, we owe no tax.
It is important to act now – you may only have 4 + months to take action before it is too late.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Comments are closed.