With harvest time comes the age-old question: Do I farm another year, or is it time to get out? The topic tends to come up in the late fall and winter, so now is a good time to review the new federal estate tax laws and share a few thoughts on farm succession planning.
Starting in 2018, the federal tax exemptions (gift, estate and generation-skipping) approximately doubled what they were prior to the 2017 tax reform. In 2018, the exemption amounts are $11.18 million and indexed for inflation. As before, a surviving spouse can elect to use the deceased spouse’s unearned exemption amount (portability).
With such large exemption amounts, why is succession planning important? It forces the older generation to take ownership of the process of determining if the farm will be passed down or sold. A little planning can create huge financial and tax opportunities that would have been lost on an unplanned transition. It gives the retiring farmer the opportunity to deal with the age-old issue--fair but not equal.
The financial benefits of succession planning are clear. With proper planning and creativity, most estate taxes can be avoided. State laws are always challenging. Farmers may be surprised that while they avoided federal estate tax, the state has an inheritance or estate tax. Currently, 18 states have these taxes. There are also two states that have a gift tax for predeath transfers. While the federal exception is $11.18 million, a few states have estate taxes that affect farmers with assets as low as $1 million.
Another economic issue estate planning addresses is cash-flow. One of the most important exercises I have my clients do is calculate family living expenses without the farm. Many times, the line between farm expense and nonfarm expense is blurry. If you no longer farm, you will still have to pay for electricity for the barn without being able to deduct it. So, understanding how much you spend is critical to figuring out how much you need when you exit. I have my clients work backward: Determine your income needs in retirement, and figure out how to get there.
Besides economic issues, estate planning addresses important family issues. I tell my clients, “The best last gift you can give your kids is for them to hate you.” While alive, parents can address the difficult issues rather than passing them down to their kids. As important as the family farm is to you, it is meaningless if there is no “family” left after the patriarch’s death.
Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minnesota.
Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax
You may email Rod at firstname.lastname@example.org.
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