Benjamin Franklin famously stated, “Nothing in this world is certain except death and taxes.” The last two years could be summed up in many ways, but certainty is not one. Paycheck Protection Program loans, Employee Retention Credits and Farm Service Agency payments popped up seemingly overnight, sending producers and practitioners scrambling to understand and properly plan for the new-found government programs and stimulus. In times of uncertainty, a focus on items within our control can be sound advice.
At the time of this writing in early November, there is much speculation on the constantly changing federal tax proposals by the current administration, though it looks promising that we will have final regulations by the time this issue of Wheat Life is published. While the proposed changes to the tax code are finally looking better for ag producers than originally suggested, the final result is still uncertain. The original bill contained three proposed changes of major concern: eliminate the step up in basis, tax unrealized gains on transferred assets and significantly reduce the value of the federal estate exemption. Any one of these would have been a monumental change, but all three together seem unthinkable. Fortunately, it appears the first two are currently off the table, and our fears are now focused on the third proposal. Practitioners and producers began circling the wagons because the reduction of the estate tax exemption would create major tax implications for closely held farm operations and possibly result in liquidation of farm assets to pay the increased taxes upon death. While we are neither certain nor can we control the end legislative result, a focus on how effectively your estate is positioned today will enable nimble and proactive alterations as tax laws change.
With the current federal estate tax exemption at $11.7 million per individual and $23.4 million per couple, many ag producers have not had to worry about paying federal estate taxes. With the new proposal, federal estate tax exemptions may drop to $5 million per individual and $10 million per couple. This will impact ag producers tremendously! If the federal exemption is dropped to $10 million for a couple, you may need to look for solutions and plan proactively or be prepared to face a large tax liability.
Estate taxes are also paid at the state level. Washington state imposes an estate tax on estates more than $2.193 million per individual and $4.386 million for couple. However, if you meet the requirements for an ag exemption, your farm assets may be exempt from the Washington state estate tax. To qualify for the exemption, you must meet three important tests. First, more than 50 percent of the value of the estate must be ag-related assets. Second, at least 25 percent of the overall estate value must be attributed to ag real estate. Third, the decedent or qualified relative must be actively farming at the time of the decedent’s death.
Gifting (amounts transferred prior to death) is at the top of the list to remedy estates that are close to taxable limits for Washington state purposes. Washington state allows for unlimited gifting; amounts gifted away during the taxpayer’s life are not included in the estate at death. For example, a farmer with a $20 million estate who has met all three requirements can gift away $10 million before death and be below the $2.193 million state exemption, resulting in $0 tax owed to Washington state. Confusing, yes, and another reason why it is critically important to engage the advice of competent advisors to help navigate the complexities associated with strategic planning and assist in forming the road map for the future.
Planning for both the proposed changes to the federal estate tax and Washington’s estate tax can be mind boggling. The good news is that there are many planning nuances awarded to farmers that are not commonly available to traditional taxpayers that can lessen the impact of these estate taxes. A proactive approach would be to take this opportunity to review current estate values and develop a plan for the future. Even if you have been significantly under the federal and state exemption for a taxable estate in the past, knowing where you stand today can help lay the road map moving forward. Seeking advice from a tax professional that works closely with farmers is most certainly essential to developing an overall plan.