Dear Michael: We have been hearing a lot about the new expenditures being proposed in Washington. How is this going to affect our farm operation? We have one child farming and two not. In our will, our farming child can buy out the other two upon our deaths at Fair Market Value or appraised value. Is this new possible legislation going to affect our estate plan? – New Laws, New Rules.
Dear New Laws, New Rules: The first thing Congress needs to do is approve the $1.2 trillion annual budget being proposed.
As it stands, the $1.2 trillion infrastructure bill would allocate $110 billion for roads, $73 billion for power grids, $66 billion for railways, $65 billion to expanded broadband access, $55 billion for clean drinking water, $50 billion for environment-proofing utility systems, $39 billion for public transit and $25 billion in airports, the White House reported.
Since the Senate voted to advance the bill, members of both parties have had time to amend and remove provisions from it. Congress could have voted on the bill by the time this has gone to press.
The bill will reportedly be funded in part by redirecting $205 billion in COVID-19 relief funds, the recollection of $50 billion in fraudulently paid pandemic unemployment benefits as well as states returning any of their unused federal unemployment funds, according to the American Enterprise Institute, a D.C.-based policy think tank.
Believe it or not, 17 Republican senators are in favor of the bill, and it is likely to pass. Because of the funding mechanism behind it with no new out of pocket payments or new taxes, perhaps this bill makes a lot of sense.
The next bill – the $3.5 trillion dollar bill – had very little support until some key items were worked out. Notably, on the farming and small business side, these businesses would be exempt from the new capital gains tax at death if a family member continued the business.
Without farming heirs, each estate would receive a “joint” exemption of $2.5 million in capital gains and anything above this amount would be taxed at the capital gains rate to the estate.
That, in of itself, is important. This “to the estate” may mean the taxes will be assessed to the estate and individual heirs would not be able to use their own taxable income to determine the capital gains rate assessed to their inheritance.
It also means these taxes would be due and payable within nine months of the date of death and the estate of the decedent would be responsible for their payment.
In your case, New Rules, New Laws, this may mean the property going to your farming child will be exempt (unless he sells it later) but the farmland that he is going to purchase from his siblings will not be exempt. Because of the wording of your will, the purchased land could be subject to capital gains taxes as, in theory, it is supposed to go to non-farming children. This would cause an uproar in your estate as some heirs will pay taxes and others will not.
Also, you stated the farming child would pay either FMV or appraised value. These two values are worlds apart as FMV is the highest value any bidder is willing to pay for this land and appraised value is an independent appraisal of your land – with no bidders.
Many people are going to have to rethink their estate planning and wills. Many people should consider using income and estate tax free life insurance to give to their children versus property that could be taxed as high as 40 percent upon death in capital gains. Many people see life insurance premiums as an expense, but remember, you are purchasing property in this case. It’s just set up in such a manner that it is not included in your estate for tax purposes, and it goes tax-free versus any other option.
These bills are likely to pass as more and more senators have agreed in principle to the new bills considering excluding small businesses and farms for capital gains if they remain family owned.
I’ll keep following up as these bills go through their gyrations prior to passage.
Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.