Farm Couple Silo

On January 1, 2013, many estate tax provisions were made permanent. Fortunately, most of the changes are beneficial to farmers and other business owners.


How “Permanent” Are Changes in Farm Estate Tax Provisions?

  • 2/19/2013

How “Permanent” Are Changes in Farm Estate Tax Provisions?

by Paul Neiffer

As part of the bill Congress passed to prevent the fiscal cliff tax provisions from kicking in on January 1, 2013, many estate tax provisions were made permanent. And fortunately, most of the changes are beneficial to farmers and other business owners.

The major permanent provisions include the following:

  • The current unified gift and estate lifetime exclusion of $5 million is indexed for inflation at $5.12 million for 2012 and $5.25 million for 2013 (based on our calculations).
  • The maximum gift and estate tax rate increased from 35 percent to 40 percent, which is less than what President Obama wanted earlier in 2012.
  • Portability allows the unused exemption amount of a first spouse’s estate to be transferred to the surviving spouse. For example, if the husband passes away with an estate of $2.12 million in 2012, the remaining $3 million exemption is added to his surviving wife’s $5.12 million exemption for a total exemption of $8.12 million. The portion remaining unused at her death may be applied to reduce her taxable estate.

Many of the issues concerning farmers, such as a reduction of the lifetime exclusion to $1 million and a possible claw-back of any large gifts made in 2011 and 2012, were eliminated.

Since the lifetime exclusion is now indexed for inflation, many farm couples with a combined net worth of less than $10 million believe they no longer need to worry about estate taxes. However, if farmland values continue last decade’s appreciation rate, their estate taxes could easily become a costly issue.

Assuming land appreciates at 9 percent annually over the next 25 years, a farm couple worth $10 million today could face a $27 million estate tax bill. Even at 6 percent appreciation, the estate tax bill could be almost $10 million. And this does not take into account any state estate taxes they might owe in addition to federal estate taxes. Of course, many changes could be made in the estate tax provisions in the future, whether they come in the form of the annual tweaking of the tax code or in a serious attempt at comprehensive tax reform. The fact is a farmer’s tax situation will continue to be fluid.

We recommend that any farm couple (or other business owners) with a combined estate greater than $5 million continue to evaluate their estate planning and consider using their available annual gift exemption amounts. In addition to lifetime exemptions, each person can give $14,000 to any number of people, annually, without the gifts reducing the lifetime exemption amount. A farm couple with 3 children and 10 grandchildren could give gifts of $364,000 annually without needing to report it or have it reduce their lifetime exclusion.

Another way to distribute gifts is to establish a limited liability company or partnership to own the farmland and then make gifts of these units instead of cash. Discounts for fractional and minority ownership may be considered in determining the value of the gift, but a farm couple could give more than $450,000 per year (under current law) and help keep their estates non-taxable at the same time.

Even though Congress helped our farmers with “permanent” estate tax provisions, we know that “permanent” only lasts until the law changes. Tax planning requires some thought, research, planning, and discussion each year. A tax professional can you take those steps.

Paul Neiffer, Agribusiness Partner or 509-823-2920