Death and taxes might be considered taboo for a dinner conversation, but it’s necessary to have such discussions with your accountant. It’s routine for the family accountant to assist with the tax implications of losing a spouse and the subsequent complexities associated with transfer of ownership to heirs. One of the most common challenges with the passing of a farmer is properly recording and transferring assets to the remaining spouse.
The transfer of ownership is established in accordance with state law, where proper titling of assets or appropriate estate instruments determine the transfer of interest to the rightful heirs. Most farm operations are established as sole proprietorships, which means they’re held in the name of the owners/operators.
There’s potential for transition concerns if a will, trust or transfer on death provision is lacking in the farm’s operating agreement. As is often the case, farm assets are comprised of non-titled
assets, such as livestock, crops and equipment. Since there is no title to direct the transfer of ownership, we have to look to other sources to discern the intent or wishes of the decedent, such as a will, a trust or state probate law. Most titled assets are designated to transfer on death or joint, which simplifies concerns.
Once the transfer concern is addressed and properly identified, the next objective is to determine the value or basis of the transferred asset in the possession of the heir, estate or trust. The valuation of the
asset is determined in accordance with federal statutes, specifically Internal Revenue Code (IRC) section 1014.
Transfers between husband and wife usually occur outside of probate, particularly in the case of titled assets. Non-titled farm assets including livestock, commodities, equipment and other intangible farm assets present a unique situation. In the case of a self-employed farmer, those assets are usually considered owned by the farmer, either through production or outright purchase through the operation. The beneficiary transfer to the surviving spouse results in a transfer of ownership and new basis. This is where IRC Section 1014 comes into play. Section 1014 states assets received from a decedent, where the asset was properly includible in the deceased gross estate, will receive a “new basis” equal to the fair market value (FMV) of such asset at the date of death of the decedent.
Where a subsequent sale occurs by the surviving spouse, gain or loss is recognized based on the value of the asset at the decedent’s death. If the surviving spouse continues the operation, either as a farmer or participating landlord, all assets received from the spouse are recorded at FMV. In the event the surviving spouse places those assets in service in his or her farming activity or landlord rental, the asset should be valued at the FMV and depreciation calculated based on the new value.
In the case of titled assets, where the asset was jointly titled with the decedent, the surviving spouse would establish two separate assets for each jointly titled asset. The original asset would be split according to the percentage of ownership with the spouse, and the accumulated depreciation would be allocated in the same manner. The second asset would be the 50% inherited from the decedent, which if placed in service by the surviving spouse, would be depreciated as a newly acquired asset. For other non-depreciable capital assets, such as land, the same process would apply; however, the land would not be depreciated but instead recorded at the new stepped-up basis.
For the farmer’s grain and/or livestock, the commodities are transferred to the surviving spouse, who receives the asset as a capital asset. The commodities are also valued as of date of death and receive a long-term holding period classification for sale as a capital asset reportable on Schedule D. Any reportable gain or loss is the result of fluctuations in market value subsequent to the valuation date.