By Megan Roberts
Over the past year, I have been asked often what is “new” in farm transition and estate planning. In general, there have been only a handful of recent changes in federal and Minnesotan laws and regulations impacting the farm succession process. Some of those changes are quite dramatic, such as the doubling of the lifetime estate and gift exclusion amount in the Tax Cuts and Jobs Act of 2017. Other projected changes were not passed into law, resulting in continuation of past policies. In this blog post, I will briefly overview federal level policy changes, Minnesota level policy changes, and end by outlining key tenants of farm succession that remain unchanged. This post covers the year from July 2017-June 2018.
At the federal level, there are two significant policy changes in the last year to overview. First, in autumn 2017, the annual federal gift exclusion increased to $15,000 (www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
). The annual gift exclusion allows you to gift $15,000 per person per recipient per year to as many persons as you wish and pay no gift taxes, nor reduce your total lifetime estate and gift exclusion. The next major policy change occurred in December with the passage of the 2017 Tax Cuts and Jobs Act of 2017. While there are a wealth of impacts from this law on agriculture (UMN Extension has separate information with information on the impacts of the 2017 Tax Cuts and Jobs Act on agricultural producers), I am going to mainly focus on the increase in the lifetime estate and gift exclusion.
The new federal tax law set the estate and gift lifetime exclusion amount at $10 million, indexed for inflation (www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
). For example, with the inflation adjustment, in 2018 every person has a federal lifetime gift exclusion that will offset (1) gifts of up to $11.2 million, (2) distribution of estate assets at death of up to $11.2 million, or (3) a combination of gifting and estate distribution of up to $11.2 million. Notice the word use of the word “or.” You only have one combined gift and estate exclusion, not multiple. The exclusion has portability, meaning whatever is not used by a spouse is transferable to the surviving spouse with the proper IRS paperwork.(Ibid.) This provision of the 2017 Tax Cuts and Jobs Act sunsets in 2025 (https://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf
There are numerous other impacts of the 2017 tax law, including changes to capital gains tax rates, which impacts farmers whose succession plan includes sales of any non-current assets that may have appreciated. The rates for estate and trust income taxes also changed. There were numerous changes to tax rates and deductions for common farm business structures, such as C corps, S corps, LLCs and others. Some of these changes are still being officially interpreted by the IRS, e.g. section 199A.
Communication is Key
In the end, the important thing to remember is what has not changed. While understanding tax and estate planning laws as well as the finances required to successfully transfer a farm while ensuring viability for the retiring party is undeniably essential, so too are the harder to define aspects of farm transition. These include family communication and effective goal setting. Successful farm transitions begin with meaningful communication about wants, needs, and fears. Although policies may change, the need for good communication will not. When it comes to the legal aspects of farm transition, consulting a skilled accountant and attorney is important. But, communicating about your farm transition goals with your family and/or business partners starts with you!