The current tax law allows a step-up in value of almost all assets at death to fair market value. For farmers, this law comes into play with the transfer of farmland.
As part of President Obama’s 2015 State of the Union address, he announced various tax-related measures to help the lower and middle class and close certain "trust fund" loopholes. Paul Neiffer, CPA with CliftonLarsonAllen and author of The Farm CPA blog and Top Producer column, says this loophole is primarily the ability to step-up assets to fair market value at death.
“With the current proposal, any time you transfer property from you to your heirs—during life or at death—President Obama wants to tax that as if it was sold at fair market value,” Neiffer says.
While it is unlikely it will be passed, Neiffer says, it provides a good opportunity to start thinking about making larger gifts.
The annual tax-free exclusion for gifting in 2015 is $14,000 per donee. “With annual exclusion gifts, it is fairly easy to gift large amounts of value each year, especially the land entity, with no gift tax consequence and still retain all of the lifetime exemption amount,” Neiffer says.
Neiffer says if you have three kids and 10 grandkids, you could easily gift away $500,000 and it won’t be subject to income tax.
“If President Obama’s proposal goes through, that $500,000 would be subject to $150,000 of capital gains or ordinary income taxes,” he says.
Neiffer says this estate tax law change was tried many years back and the administrative issues were immense. “The chances of this passing with Republican control of the House and Senate is somewhere between slim and none, but it is always wise to know when you might be considered a ‘trust fund’ loophole,” he says.
View a PDF of Neiffer’s Top Producer Seminar presentation: Tax Tips for 2015
Read Neiffer's blog: The Farm CPA