Tax & Succession Planning in the 2021 Legislative Climate

Tax & Succession

Planning in the 2021 Legislative Climate

What can producers expect from the Biden Administration – and how can they prepare their farms?

by Joli A. Hohenstein

With a new administration in place and an evolving political climate, the ag industry has watched closely to see how potential tax law changes may affect producers in 2021 and beyond. What can producers expect from the Biden Administration, and what should they do to prepare their farms for the next generation?

The two most critical concerns for producers in the current proposals, according to experts, are repealing the step up in basis and imposing new capital gains taxes on family farms and ranches when there is a death in the family. It’s important for producers to monitor these efforts and express opposition whenever possible. Why?

The American Families Plan is a $1.8 trillion proposal to make $1 trillion in new investments and provide $800 billion in tax cuts over 10 years. The President proposes to pay for the plan with tax increases, including: • Repealing the deferral of gain for real estate like-kind exchanges for gains greater than $500,000 • Eliminating stepped-up basis for gains in excess of $1 million ($2.5 million per couple “when combined with existing real estate exemptions”) and taxing the gains if the property is not donated to charity What does this mean for producers? Let’s take a deeper look.

Eliminating Stepped-Up Basis for Gains

“There are more than four times as many farmers and ranchers aged 65 and older as there are those under the age of 35, and these individuals own more than 40% of agricultural land in the United States,” according to a letter the National Cattlemen’s Beef Association (NCBA) and other key agriculture entities submitted to Congress. More than 370

million acres are expected to change hands in the next two decades.

“Assets in agriculture are typically held by one owner for several decades, and resetting the basis on the value of the land, equipment and livestock on the date of the owner’s death under a step up in basis is important for surviving family members,” says Danielle Beck, Senior Executive Director, Government Affairs, NCBA. “Discontinuing this benefit has the potential to create massive tax liability for the heirs when they ultimately upgrade or transfer these assets.” For example, upon death, a repeal would cause an immediate, one-time tax liability equivalent to 280% of the farm’s annual income, based on a theoretical family-owned cow-calf operation.

Politicians say the plan includes protections for familyowned businesses, to ensure they don’t have to pay taxes for assets given to heirs who continue to run the business. However, under many parts of the tax code, “family” does not include relatives such as nephews, nieces or cousins, which means capital gains (effectively a transfer tax) could still apply. So, if an uncle has no kids and leaves land to his nephews, tax implications may arise.

Another potential issue comes for families with multiple children. If, for example, parents leave the farm to their three kids, but only one of them farms the ground, the other two siblings may have to pay taxes on it. Because they do not technically “run the business,” they wouldn’t be exempt.

Repealing Deferral of Gain for Like-Kind Exchanges

Repealing the deferral of gain for real estate likekind exchanges also presents a significant issue for many producers. Currently, farmers can exchange like for like – exchange real property such as land, buildings, equipment

or breeding and production livestock, without recognizing taxable gain on the sale of the old assets. These transactions can range from simple trade-ins or two-party swaps to complex non-simultaneous exchanges involving separate buyers and sellers.

“Like-kind exchanges are an important tax provision for farmers and ranchers because they help agricultural producers operate more efficient businesses by allowing them to defer taxes when they sell assets and purchase replacement property of a like-kind,” says Beck.

Repealing this deferral of gain for like-kind exchanges helps farmers and ranchers cash flow and reinvest in their businesses. It would result in a huge tax increase and would threaten the already razor-thin margins of most farms and ranches – in turn jeopardizing the next generation’s business viability.

What You Can Do Now

As of presstime, these are still just proposals – we don’t know what any actual legislation would look like – so what should producers be doing now to protect and preserve their farms?

One strategy that’s low-hanging fruit is gifting assets of fairly significant value to generations to lock in current exemptions. Why is that important now? “Any gifting now is likely to be grandfathered in,” says Charles LeFebvre, an Illinois attorney who engages in tax and estate planning for entrepreneurs, small business and farming families. “Illinois has an estate tax, but Illinois does not have a gift tax.”

“I think we can be reasonably confident that the estate tax exemption level might go down dramatically,” he says. Illinois producers, however, may be less affected than others. That’s because Illinois has an estate tax that’s lower than others. And if Illinois producers are working with planners who understand Illinois tax laws, they’re likely ahead of the curve. Gifting is always challenging, says LeFebvre, because older generations want to retain control of business assets, but if producers are facing a taxable estate, or if the assets could fall under changes occurring in the tax laws, it would be worth considering.

Another often-overlooked strategy LeFebvre recommends: retirement and the Illinois state income tax. “You can’t get away from it by becoming a resident of Florida or Texas, if your business is still in Illinois,” he says. “But Illinois income tax does not apply to retirement income. I see people constantly feed assets back into the business and overlook a retirement plan. The benefit of a retirement plan is, it grows tax-free, and post-retirement, you can avoid state-level income tax. It’s a planning opportunity that this particular industry doesn’t take advantage of from an estateplanning standpoint. It seems to be underutilized.”

Given the current tax proposals, considering all options makes sense for Illinois producers as we wait to see how policies develop.

As for advocacy right now, Beck encourages producers to engage with their legislators. Members looking to engage can find the complete letter to Congress at policy.ncba.org.