Could this Create a Problem on Our Farm?

Problem: Could the estate tax sunset create a problem for our farm?

I’m very concerned about estate taxes. We have worked hard for what we have, and we don’t just want to give it all away to the government when we die. We keep seeing all these articles about the estate tax laws sunsetting on Jan. 1, 2026. That’s only a year away, and it doesn’t sound good. What should we do?

 – From K.B., via email

Solution:

This is becoming a common question as the sunset date nears, K.B. I’ve heard from families with estates from $2 million to $80 million, and they all seem equally concerned. Families on the higher end of that spectrum may have a legitimate problem; those on the other probably won’t be affected at all.

For most farm families, fairness and distribution issues are far more concerning than estate taxes, but this is new territory. Why? We have had sunsets before, which generally have resulted in more favorable estate tax limits. This time, the potential combination of much lower estate tax limits amidst the effects of high inflation and record high asset values would hurt more farms.

Here are a few things to consider:

1. We expect this law to be addressed favorably by the new administration, but we must assume at least some chance the law will sunset. 

Remember: The sunset automatically occurs unless Congress proactively votes to change this.

2. Everyone should accurately assess the fair market value of their farms: 

not the number the lender puts on it, not the number on the balance sheet, not the original purchase price, but rather what it would appraise for or bring at an auction. For a married couple, if that total is less than $14 million, you probably have a small risk even if the law sunsets to about $7 million per person. 

3. Understand various strategies that may position you for discounts such as undivided interest, minority interest, entities with restrictions for rental options, and buyout options. 

These strategies can be prepared ahead of time and implemented if/when needed.

4. Understand IRS code 2032A with special use valuation. 

It essentially allows an extra $1.3 million credit per person for those who qualify. Previous proposals greatly expanded this credit if the federal estate tax limit decreased.

5. Remove non-beneficial assets from your estate. 

The easiest example of this would be your life insurance. If you own your policy, the death benefit is included in your estate. Having your insurance owned by your children or a trust may be a consideration.

6. Give it away during your lifetime. 

We know what the limit is now, so this may seem like a simple solution. But keep in mind that may affect your income, and the receiver will not get a stepped-up basis on gifted assets. onsider using all of the exemption for one spouse rather than some of both spouses’ exemptions. 

7. Don’t panic. 

Some legal advisers and financial planners love this environment because it’s a new opportunity to sell something. There may be a time and place for those strategies and products, but it’s prudent to educate yourself first.

8. Understand your state estate tax limit.

There are many farms that don’t have a federal estate tax problem, but depending on your location, you could have a problem at the state level.

There certainly are reasons to have an uneasy feeling about politicians, but the recent election resultsare likely to be favorable to the federal estate tax limits. Remember to focus on what you can control.

Maybe you don’t have to give it away. Yet.