Change Your Tax Mindset - 4

Gifting Strategies Could Cause Higher Tax Bill for Next Generation

Katie Micik Dehlinger
By  Katie Dehlinger , Farm Business Editor
Tax planning takes long-term perspective, and recent changes make it less beneficial to gift assets and commodities during the donor's lifetime. (DTN/The Progressive Farmer file photo)

MOUNT JULIET, Tenn. (DTN) -- 'Tis the season for giving, but if annual gifting strategies are part of your estate plan, you may want to reconsider.

Congress raised the estate tax exemption levels to $11.2 million per person or $22.4 million per married couple in 2017 tax reform legislation, and that's high enough that a majority of farmers can avoid estate taxes altogether.

"It didn't take a lot of real estate to be exposed to estate taxes, and so there was a lot of incentive to gift portions of that real estate, or the company that owned real estate, in order to reduce this taxable estate," said Cal McCastlain, an attorney with Dover Dixon Horne in Arkansas. "Now the real driver or the incentive for that gift plan is no longer there."

Worried your heirs will think you've suddenly turned into Mr. Scrooge? Don't be. The decision not to gift annually may save them money in the long run.

"Just sum it up as tax basis planning," McCastlain said.

Another change that affects gifting plans: Tax rates on commodity gifts to children are higher under the new law, making such moves more expensive for the receiver of the gift.

"The 2017 tax act got a lot of attention for the significant changes that were made on the income tax side. Everybody certainly needs to give those attention. From the estate tax planning standpoint, it was rather simplistic, but extremely significant and impactful," McCastlain said.

These are a couple of ways changes to the tax code are forcing farmers to change their mindset. In this four-part series, DTN explains how to maximize deductions by avoiding losses, how changes to rules governing equipment trade-ins could complicate your state tax return and why it might be a good time to change your farm's corporate structure and reconsider gifting strategies. This story is the last in the series.


Farm real estate makes up four-fifths of the total value of farm assets, and while prices have leveled off in recent years, they've appreciated significantly since the farm crisis in the 1980s while maintaining a low tax basis.

When you gift real estate or interest in real estate, the recipients take a carryover tax basis. If they decide to sell, they're exposed to a substantial capital gains tax since they'll have to pay taxes on all of the appreciation since the real estate was purchased.

If the property is received in inheritance, it gets a step-up in basis, which resets the tax basis at fair market value, lowering the capital gains due if the recipient later sells the property.

"Gifts to family members are great, and still should be considered when that's what the donor wants to do," McCastlain said. "There's no longer the estate tax incentive to enter into a gifting plan. Without that incentive, they should then stop and evaluate capital gains tax exposure for the next generation."


While typically not part of an estate plan, some farmers gift their children commodities to help cover large expenses, like paying for college. If children are subject to the so-called "kiddie tax," they are now subject to the trusts and estate rates, not the parents' rate. While this still saves self-employment tax, it subjects commodity gifts to much higher tax rates.

For instance, once a gift reaches $12,500 in value, any amount over that is taxed at 37%.

"In this case, you'd be better off to pay your children either in regular wages or by paying them wages in commodities," said Rod Mauszycki, principal with CliftonLarsonAllen in Minneapolis, and DTN/The Progressive Farmer's tax columnist.


McCastlain said that anytime there's a significant legal change or change in your personal life, you should reevaluate your gifting strategies and estate plan.

The first step is determining whether you will be exposed to the estate tax now that the exemption limits are higher. If you're not, you may be able to simplify your plan.

Married couples that used two-trust estate planning techniques to maximize deductions and those that employed annual gifting strategies could benefit the most from simplifying. Many farms used irrevocable trusts for estate tax purposes, and those trusts should continue to serve the purposes they were designed for; there's just a lower likelihood that they'll be utilized in future estate tax plans.

Trusts can be a valuable tool for asset management, and McCastlain encourages farmers to ask themselves a variety of questions including: How do I want my assets managed? Do I want my beneficiaries to receive these assets outright? Or is there anything in the nature of the assets, the amounts of the assets or the personal situations involved that would justify keeping assets in a trust?

"Those techniques may still serve a lot of people very well," McCastlain said. But, "now you can put more focus on what the family needs, what is best for the family, and not have it complicated by the estate tax."


Des Keller contributed to this report.

Editor's Note: If you're interested in learning more about how to profit from tax reform and how to strengthen your financial foundation, make sure to attend the DTN Ag Summit in Chicago Dec. 3-5. You can find all of the details at


Katie Dehlinger