Generational Transfer Tax Law Changes
GreenStone tax graphic


President Biden announced the American Families Plan in April 2021. There are significant benefits in the Plan for families depending on eligibility – universal pre-school, free community college, direct support for childcare, a paid family and medical leave program, extension of the ACA premium tax credits, an extension and increase of the child tax credits, and an expansion of the earned income tax credit.


These benefits need to be paid for somehow, and the American Families Plan included details of proposed tax law changes to pay for the benefits with other taxes, with most focused on income earned by taxpayers in excess of $400,000.  


There are also significant proposals to change estate tax laws: Senator Sanders’ 99.5 Percent Act and a Democratic Coalition proposal called the Sensible Taxation and Equity Promotion (STEP) Act.


First let’s summarize the current estate law when the owner of a farm or ranch dies. Currently, $11.7 million per individual and $23.4 million per couple in assets are exempted from the federal estate tax. This protects most farms from the estate tax. When a decedent passes farm assets to an heir, the heir can take fair market values as their basis in the property (i.e. stepped-up basis), effectively avoiding capital gains taxes. Considering cropland values have roughly tripled over the past 25 years, producers are extremely sensitive to any changes to the estate tax exemptions or stepped-up basis. 


The 99.5 Percent Act would decrease the estate tax exemption to $3.5 million ($7 million per couple), among other things. The STEP Act proposes to eliminate stepped-up basis upon death of the owner. 


What percent of agricultural producers would be impacted by one or both of these proposals? The Agricultural and Food Policy Center (AFPC) at Texas A&M University released a report of their findings on June 15, 2021. AFPC maintains a database of 94 farms located in 30 different states. Below is a table from page 16 of their report to show findings and the impact of these proposals on these 94 farms:


As you can see, 92 of 94 farms would be impacted by the STEP Act, and 41 of 94 would be impacted by a generational transfer tax. 


There’s an old saying that farmers are cash poor, dirt rich. This is due to the asset-intensive and low-margin nature of the agriculture sector. Farmers’ strongest asset historically is their land. Land values have generally always risen, and farmers use it as the primary collateral to fund their business operations. The 99.5 Percent Act and STEP Act will create significant tax liabilities upon transfer for many capital asset-intensive businesses like farms. 


Farming is a family business – in excess of 95% of our nation’s 2 million farms are owned by families individually, or through partnerships and corporations. The goal that multi-generational farmers strive for is to hand the farm off to the next generation in a better operating and financial position than what they received it. These proposed tax law changes could be a huge blow to that goal. Generational transfers will be saddled with debt loads that may or may not be supportable by business operations. It will cause farming families to consider these options: 


Take on the debt load resulting from a generational transfer 
Sell a portion of their land to cover the tax 
Get out of farming altogether because it doesn’t make financial sense to keep farming 


The Biden administration has proposed creating tax carve outs reportedly to protect farmers and ranchers. Details of these carve outs are not available at this time. One proposal noted that, as long as the farm stays in the family, no tax is due. 


Senator John Boozman, ranking member of the Senate Committee on Agriculture, Nutrition, and Forestry stated, “The data speaks for itself and should give pause to anyone considering this approach as an option to pay for new additional federal spending…”   


Members of both political parties have voiced concerns with these proposals. House Agriculture Committee Chairman David Scott (Democrat), wrote President Biden in June saying that while he supports the American Jobs Plan and the American Families Plan, he is worried the proposals to increase taxes to pay for these programs could hurt farmers. “I am very concerned that proposals to pay for these investments could partially come on the backs of our food, fiber, and fuel producers,” Representative Scott wrote. 


Agricultural producers should pay close attention to these proposals to understand how their farming operations may be impacted in the future. 


To view the article in the online 2021 Summer Partners Magazine, click here.

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