Dear Michael: We have considered giving more of our property away today than waiting until the estate and gift tax law changes. We have some property we bought recently with some debt left on it and we would hold onto that while giving our children some of our older real estate that has no debt. How soon do you think we need to move on this? My health is not good as I have cancer, but I do not think I will die this year. What should I be considering? On the Gift Fence.
Dear On The Gift Fence: I have received a lot of calls lately about gifting lately.
Here is the deal: Currently, you can pass up to $11.5 million dollars per person and the heirs would receive a stepped-up tax basis in the property. This is the current law.
In addition, IRS has a new law that states if you exceed the $15,000 tax-free gift per person, the excess “will not have to be reclaimed” by your estate if the estate/gift tax are lowered in the future. Now, by saying “in the future,” it means if they change the law, no recapture of gifts can be applied during this tax period.
Everyone knows President Biden has talked about raising estate taxes, but he has not! He has talked about getting rid of step-up basis. In other words, when you die and leave low basis assets to your children and they sell them later, they would have to pay capital gains on the increased value over and above what you paid for them.
Therefore, your estate would have no tax, nor would your children ever pay capital gains tax – if the children do not sell the assets in the future. If you are leaving low basis farmland to a farming child, and you do not want them to sell it at any time, this loss of step-up basis would give many of them pause.
If you pass other assets – such as savings, cash, life insurance death benefits – to non-farming children, they will incur no estate taxes nor capital gains taxes. This is particularly important in how you set up your estate plan – if you state in your will your farming child is to buy out low basis land from the non-farming children.
In your scenario above, with your health in consideration, you may want to wait and see what happens or how soon it happens. If you should die before the end of 2025, it is very possible the land will still be stepped-up.
You might consider a life estate on the land – if you would like to maintain control of it. A life estate would give you control (use and income rights) and gets a full stepped-up basis at the time of death. Because of the stepped-up basis on life estate property life estate’s assets are included at FMV in your estate at the time of death.
If the law is to be changed – and it cannot be changed by executive order, it must be put to Congress – you will receive a fair amount of notice about any bills being proposed. If you get notice a new tax law is going to pass, you can always snip the “life estate” string and your son will own it outright.
At this point in time, no bills have been proposed and, with all the watchdog groups watching and pouncing on anything new that pops up, if a new bill is proposed you will hear about it within the week.
Even if it is proposed, remember the Democrats need every Senator to vote for it and, believe it or not, Democrats also have a lot of wealthy supporters helping them get elected each year. By voting for such an increase before the end of 2025 these senators might lose a lot of wealthy constituents who would be affected by this tax.
As such, there very well could be a few Democratic senators who will prefer to wait until 2026 (when the laws sunsets back to $1 million) and come out looking a hero if they press to have it raised to $5- or $6-million per person.
Perhaps the biggest reason why rocking the boat right now is a bad idea is this. In Obama’s last year, when we had $5 million estate tax levels – of over 190 million estate tax returns – IRS only received $16 billion in revenue. In today’s trillion-dollar world, that is a drop in the bucket.
If I were you, I would use the life estate, but I would use the land I just purchased. This has a much higher basis. If my banker does not like this, I will transfer my debt to my older property. If they change the laws, I can always cut the “life estate” string before the new law passes.
There are a lot of different ways to do estate planning these days, and you need to be informed of all your options before you make any hasty decisions. You have got time!
If I were doing your estate planning, I cannot do legal work but I will have you look at things from every angle so you can make an informed decision that is best for you – short-term and long-term.
Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.