Taxlink by Andy Biebl

The questions are often the same. Does it make sense to give my land to the kids now before it becomes my estate? Or perhaps I should sell some of it during my lifetime? Or is it better to just let them inherit the land? I've heard these questions for years, but with our constantly changing tax system, the answers might now be different.

THE ESTATE TAX EXEMPTION

Congress recently indexed the federal estate tax exemption. For deaths in 2015, we've reached $5.43 million per person. Effectively, a husband and wife can transfer over $10.8 million to their children free of federal estate tax, assuming that each exemption is fully utilized. The danger is that if the assets exceed the exemption, the estate tax applies at a substantial 40% flat rate.

TRANSFERS DURING LIFETIME

The $5.43 million exemption is actually a cumulative transfer amount that can be consumed either during lifetime or by passing assets at death. Thus, if large lifetime gifts are made, they reduce the exemption amount available at death. But the first $14,000 of gifts to each person each year is totally exempt; none of the permanent exemption is utilized. Accordingly, for wealthier individuals who face an eventual estate tax, using the $14,000 annual exclusion to multiple family members is very efficient.

But when it comes to farmland transfers, it's impractical to regularly use the small annual exclusions. That's why estate planners often recommend the use of an entity, such as a limited liability partnership, to hold the land. Gifts of partnership units can be made in small annual increments to efficiently utilize multiple $14,000 gift exclusions. There can be significant management advantages also in terms of holding the land together for the heirs.

THE STEP-UP IN BASIS

With today's large estate exemption, most individuals don't face a threat from the federal estate tax. In that case, lifetime gifts can be detrimental because a gift results in a carryover of the donor's tax basis in the asset to the recipient. If land bought 50 years ago is transferred by gift, the children have dad and mom's low tax cost when eventual sale occurs. On the other hand, when assets are passed by a decedent at death, they are revalued to current fair market value in terms of tax basis. This provides the heirs with a so-called step-up in basis, and eliminates the capital gain tax on all of the pre-death appreciation.

Lifetime sales are more complex. For those in the lower tax brackets, an installment sale can result in a capital gain tax rate of zero. Most of my clients are O.K. with that rate. But for upper income filers, the tax rate can range from 15% to 23.8%. In this case, it's generally better to pass the asset through the estate, achieve a step-up in basis, and allow the heirs to minimize any later capital gain tax.

Finally, consider state estate taxes. Some states have much lower exemption levels than the federal. Sophisticated tax planning may be warranted, given that you can't move your land to a more tax-friendly state.

EDITOR'S NOTE: Andy Biebl is a nationally recognized CPA and tax principal who specializes in agriculture with CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minnesota. He writes tax columns for DTN and its sister publication, The Progressive Farmer magazine. To submit questions for future columns, email AskAndy@dtn.com. Subscribers can always find Biebl's most recent columns in Town Hall or on the Farm Business page.

(MZT/CZ)

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