Farmers with substantial wealth tied up in farmland should consider making large gifts of the land now instead of waiting until later. Currently, farmers who own farmland in some type of limited liability entity (LLC, LLP, LP or LLLP) are allowed to take several tax discounts due to it being a closely held family business.
These discounts range near 35% in most cases. This allows a farmer to transfer farmland at a lower gift value than outright transfers of land parcels. For example, assume a farmer wants to transfer $8 million of land value to his kids. If he transfers the land outright, he will owe gift tax of about
If he is able to take a 35% discount, the land value for gift tax purposes is now $5.2 million. Because his lifetime exemption amount is $5.45 million, he owes no gift tax and still has $250,000 available for non-taxable gifts.
However, in August of this year, the IRS proposed new regulations to make this more difficult. If the proposed regulations are finalized, the farmer would likely have to value his gift of farmland closer to the $8 million level than the lower $5.2 million discounted value. The proposed regulations will not be in place until December at the earliest; however, there is chatter in Congress to prevent these changes, but nothing is certain right now.
For married farmers with a net worth less than $10 million, making gifts now likely does not make sense. This is due to farmland and other assets receiving a step-up in value when it goes through an estate.
Married farmers with a net worth in the $10 million to $20 million range might want to consider making some larger gifts. However, these farmers can continue to take advantage of the annual $14,000 gift exclusion amount to make gifts. Farmers with three kids and 10 or so grandkids can easily transfer close to $500,000 of value each year (even without the discounts). This would allow these farmers to get their estate closer to no estate tax being owed and still have enough assets to comfortably live on.
Remember, it can be more important to make sure you have enough assets during your retirement years than worrying about your heirs owing a small amount of estate tax. If you want no estate tax to be owed and are charitably minded, you can always set up your estate for your children to get the full maximum non-taxable amount allowed with the remainder going to charity.
Farmers with a net worth greater than $20 million should seriously consider making large gifts this year before the proposed regulations go into place. Even if they never get implemented, it’s still good to “freeze” the estate at these values so heirs don’t face an even higher estate tax bill.
For example, assume a farmer has $25 million of farmland (in some areas this is less than 2,000 acres) and elects to hold it until he passes away when it is now worth $50 million. Currently, the farm couple could gift about $18 million of value (before discounts) and owe no gift tax. The remaining value would be included in their estate and heirs might owe $2 million to $5 million depending on its value at death.
However, if the couple holds the farmland until death, the estate tax could easily be $15 million or higher (depending on inflation of the lifetime exemption amount).
Farmers in this situation should discuss their options with their estate tax adviser now. There is not much time to take action if needed.
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