With the COVID-19 relief bill enacted, the administration of President Joe Biden and Vice President Kamala Harris administration is making more rumblings about its intentions for tax policy. As of this writing, nothing has yet found its way into legislative proposals. I don’t like to spend a lot of time writing about what might or might not come to pass. Clearly, ag has a stake in this.
But let’s start where we ought to. Do you have an estate? Do you have people in your life who you care about? If so, then you should plan to make sure what you have goes to whom you want, when you want and the way you want. It is probably hard, which may be why you keep putting it off. How will different family members be affected? What will be the impact on relationships? How can you give everyone something they’ll appreciate, even though it won’t be equal?
After you have invested serious time with good advice on the hard part, tell your professionals, “Obviously, I want to make all this happen with the least possible taxes.” Your attorney should be able to advise you how to bring about your desired results with minimal taxes. As you make that request, what new Biden-Harris taxes might the estate planning attorney need to address in your plan?
According to Bloomberg, “Behind the scenes, aides have been working on a proposal.” They’re looking at boosting income and capital-gains tax rates on top earners, and at expanding the estate tax to help fund Democratic party priorities.
When someone questions that, Jen Psaki, Biden’s press secretary, says those at the top aren’t doing their part. And if pressed for a number, she’ll circle back to $400,000 per year. So, if you have a good enough year farming to make that large land payment and take a vacation, you are perceived as one not doing your part under the current tax rates.
Senior members of the Biden administration like David Kamin, deputy director of the National Economic Council, have been working for years on options to raise revenue. He suggests that increasing tax on capital gains and eliminating stepped-up basis are in the works.
Capital gain on a large transaction like the sale of real estate would be taxed not under the capital gain tax rate of 20% plus the 3.8% Affordable Care Act surtax, but at ordinary income tax rates. That income tax rate is currently 37% but would rise to 39.6% under Biden’s broader proposals to roll back 2017 tax rate changes.
Stepped-up basis for estates resets the basis on appreciated assets from their original purchase cost to the date-of-death value. This would not trigger taxes on death but would make it much more costly to sell assets — even among family members — after they inherit. Further, under current law, when a farmer leaves depreciated assets like equipment and property improvements to their successor, that successor can redepreciate those assets against their own self-employment income as if they purchased them for the date-of-death value. Eliminating the stepped-up basis will take away that long-standing tax strategy.
Recognize gain on death
Loss of step-up would be unfortunate, but there is a much worse proposal afloat. According to CNN, when the farmer leaves appreciated assets to heirs, “Biden would require estates to pay taxes on the unrealized gains on these assets.” The devastating impact of that is hard to overstate. Take a small farm, for which you paid $800,000, now valued at $2.8 million, plus $500,000 in fully-depreciated equipment, and it would be taxed as though you had a one-day auction the day before you died: $2 million in capital gain, taxed as ordinary income, plus $500,000 of recaptured depreciation, all taxed at 39.6%. With state taxes added, well over $1 million would be lost to taxes — even without an estate tax! This would be regressing to the day when heirs sold the farm to pay the taxes.
Finally, Biden would roll the estate tax clock back to 2009, when the rate was 45% and the amount exempt from tax was only $3.5 million. To put that in perspective, land values have appreciated by 65% since then, while the reduced exemption would be less than one-third of what it is today.
The clear point: Don’t wait for Congress. Make plans for your estate to do all the good it can for your loved ones. Get the hard part figured out as soon as you can. Then let your advisers help you react, where needed, to new tax laws as they happen.
Attorney Ferguson owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.
The opinions of this writer are not necessarily those of Farm Progress/Informa.