This article appears in the April 2021 issue of Potato Grower Magazine.

This article provides a post-election update focused on estate tax rules and highlights the opportunity to avoid the $7.38 million (or higher) tax that may be headed your way.

As of this writing (Feb. 18, 2021), federal tax code provides a historic opportunity to protect family farm and business legacies from massive taxes levied by the federal government. Despite what you may have heard about changing tax laws, the opportunity to avoid paying unnecessary tax is larger right now, in early 2021, than it was prior to the election in 2020. The concern is thatCongress may change the rules soon. If these changes follow the “Biden tax plan,” those who don’t act on the current opportunity may risk losing their family’s legacy. Those in an ownership position today have the choice between making their own tax plan or following the congressional tax plan. The latter is the default option and likely carries the higher cost. 

“Down the Road” is Here

For the past few years, estate planning professionals have advised growers, business owners and investors to take advantage of the temporary opportunity the Tax Cuts and Jobs Act of 2017 created to protect and transfer assets for future generations. However, for many, it seemed there was always time to act “down the road” because the estate tax laws were not scheduled to change again until the end of 2025. If you look at your own situation, as is the case for most growers, there is probably always something more urgent demanding your attention than estate planning — from planting to harvest and everything in between.

Following the presidential election last year and the Senate runoff in Georgia this January, we saw a meaningful shift in the balance of power in Washington, D.C., to favor the Democratic party. As a result, the enactment of the Biden tax plan has become a real concern (for a summary of potential changes, visit www.taxfoundation.org). We have arrived “down the road” at a point where the Trump era tax cuts still exist, but likely don’t have much road left to run.

Quantifying the Current Opportunity 

So what can be done in the here and now to take advantage of the current, probably short-lived tax situation? Here are the most important things to know:

• You can still transfer up to $11.7 million worth of assets per person to your heirs free and clear of the current 40 percent federal estate transfer tax. That means a married couple can transfer $23.4 million worth of farm, business, real estate, stocks, bonds, cash, etc. today without incurring the transfer tax.
• You don’t have to die to use the exemption. About half of the estate planning we do deals with using the exemption right now, before it expires, while everyone is alive and well.
• The current $11.7 million exemption is scheduled to reset to roughly $6 million at the end of 2025. The current exemption was made temporarily high by the Tax Cuts and Jobs Act of 2017, which included the 2025 sunset provision.
• The Biden tax plan could decrease the ability for families to transfer assets tax-free from $11.7 million to $3.5 million per person and increase the tax on everything above the exemption to 45 percent.
• Compounding the problem, the Biden plan may also eliminate the step-up in basis rule at death, creating embedded income tax liability for those sell assets after the current owners have passed away.
• Further compounding the problem, the Biden plan could roughly double the tax rate on capital gains from 20 to 39.6 percent for income over $1 million.

Applying the Math

Let’s walk through a quick hypothetical example to see how the potential upcoming tax law changes could impact an operation’s survival. This example assumes a farm owned by a married couple valued at $23.4 million today:

• Current rules: $23.4 million tax exemption and 40 percent tax = $0 estate tax
• Biden plan:$7 million exemption and 45 percent tax = $7.38 million estate tax
  • Plus potential capital gains tax on assets sold to net $7.38 million = $4.84 million tax if zero basis
  • Total combined federal tax cost = $12.22 million
  • 52 percent of total estate assets could potentially go to tax

This simple example makes assumptions for illustrative purposes and ignores several layers of estate settlement costs such as state income tax, tax and legal fees, commission on the sale of assets, potential fire sale scenarios, or lack of potential buyers in the nine-month timeframe required to pay the tax.

Key Questions

With that in mind, a couple questions come to the fore: Is there any reason you would choose to disinherit your family, potentially to the tune of 50 percent, in favor of giving those assets to the government? If you do nothing and your estate is faced with a similar level of tax, would your farm and business legacy survive?

Summary

The rules have not changed yet, and it is your choice whether to act on the opportunity. There is some chance that the rules could change and be made retroactive. However, most estate planning professionals would likely tell you that risk is very low compared to the risk of doing nothing. Estate planning at this level is not a DIY project, nor should you expect it to be accomplished quickly. We encourage anyone evaluating whether to use their current exemption, or how to use it, to seek out experienced guidance from an estate planning professional.

Ryan Baker is a partner and estate planning specialist at Open Advisors in Meridian, Idaho. He is also a member of Lincoln Financial Network’s national Agribusiness Service Group. Baker helps farming families throughout Idaho and neighboring states. For more information, visit www.myopenadvisors.com/team/ryan-f-baker.