We now know the outcome of the national election. The change will mean the implementation of policies that will increase taxes. We won't know exactly what those tax increases will be until legislation is proposed and passed, but we can have an idea of the types of changes that are coming based on the campaign.
Based on statements made by our newly elected candidates and president, here is my best estimate of what America can expect. Remember, what they say and what they actually accomplish are two different things. But it appears that farm and ranch families could be significantly impacted.
Under current law, if you die in 2021, the first $11.7 million is exempt from federal death tax. If you are married, with proper planning, you can double that number. On Jan. 1, 2026, the current law adjusts to half that amount.
President Joe Biden has proposed an increase in the death tax rate from 40% to 45%, and reducing the exemption from $11.7 million to $3.5 million. This will have a major impact on the ability for farm and ranch families to transition their property and equipment to the next generation without significant liquid assets to pay the tax. The recent trend of professionals relocating out of cities and buying rural properties is increasing property values, compounding the problem.
Capital gains taxes
Under current law, assets receive an adjustment in tax basis to the value on the date of your death. This is called stepped-up basis and can eliminate built-up capital gains in land and other assets. Biden’s plan is to eliminate the adjustment in tax basis at the time of death and, in addition, require recognition of the gain at the time of death.
His plan also includes increasing capital gains tax rates to as high as 39.6%. The impact of these changes could be catastrophic for farm and ranch families, particularly if those families gifted their land holdings forward over multiple generations rather than having them transfer upon death. This could result in the next generation paying tax on a gain based on what their grandfather paid for the property generations ago.
Under current law, the gift tax and the death tax are unified. Each individual can gift up to a lifetime maximum of $11.7 million. Under Biden’s proposal, the lifetime maximum would be reduced to $1 million. If tax legislation passes, including this type of provision, significant planning opportunities related to mitigating death and capital gains taxes will be lost.
What should you do?
First, remember that what I’ve discussed here are proposed tax law changes. None of these have been enacted. You should investigate the specifics of each of these proposed changes and evaluate the potential for these changes to become a reality.
Second, if you believe that these changes could become a reality, you should be taking action now to put the planning in place to reduce the impact by taking advantage of opportunities that exist under the current law.
Third, you should begin planning to take action now. Once the legislation starts moving through Congress, there will be a stampede of people attempting to adopt and implement the techniques to deal with the pending legislation. The design, preparation and implementation of these types of techniques take time. They cannot be done effectively at the last minute. If you plan for the potential danger, you will be in the best position to minimize its impacts.
Fourth, do not lose sight of your family and succession goals that are not tax-related. How your farm or ranch transitions to the next generation is just as important as doing so in a tax-efficient manner. When there are significant tax law changes, many families abandon their underlying family goals to save on taxes.
This is very common when new legislation comes on the scene and every financial and tax adviser is saying “You need to do this to save taxes.” These tax strategies usually significantly impact other objectives. If the professional is just selling you a tax strategy, they are not considering the impact of that strategy on your other goals. Planning with your goals in mind, and designing tax strategies to work in conjunction with your other goals, always produces a better outcome for your family.
We never know what the future holds. But wise families will plan for their future and do so in a manner that allows them to minimize risks and take advantage of opportunities, putting the family in the best position to succeed in the future.Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession, and legacy planning objectives. Dolan is the principal of Dolan & Associates PC, in Brighton and Westminster, Colo. Learn more at estateplansthatwork.com