The U.S Estate Tax
In the heart of America’s vast farming landscapes, family farms represent more than just agricultural businesses; they are carriers of tradition, the backbone of rural communities, and almost 2% of the population’s livelihood. However, as land and machinery prices have continued to rise over the past decade, the Estate Tax system has emerged as a potential threat to family farms.
Understanding the Estate Tax: The estate tax applies to the transfer of “taxable assets” of a deceased person, which includes anything they own or have an interest in at the time of death. In 2024 at the time of writing the current estate tax exemption amount is $13.61 million for individuals and $27.22 million for married couples. However, this exemption is set to decrease if not extended beyond 2025.
For some larger operations, the value of land, equipment, crops, and livestock can push an estate over these limits. While there are relief provisions, like the special use valuation of farmland, which can lower the assessed value for tax purposes, these measures may not be sufficient for asset-rich but cash-poor farms.
The Burden on Family Farms: The primary concern for family farms is the liquidity crisis that estate taxes can provoke. Unlike other businesses, farms often do not have enough cash on hand to cover a sudden tax bill. Selling assets to pay taxes not only disrupts a farm’s profitability but can also lead to a selling spiral where land is forced to be sold to cover the taxes. Forced sales dismantle decades of family legacy and cause some farms to no longer be viable depending on the size.
Economic and Cultural Implications: Culturally, family farms are staples of tradition, knowledge, and community identity. Contributing significantly to the rural economy's flow of money, they employ community members and support local businesses such as feed suppliers, seed dealers, and machinery dealers. When farms disappear or are absorbed by larger entities the economic ripple effect can be devastating for communities.
Legislative Efforts: There is currently a major push for lobbying groups for estate tax reform. The American Farm Bureau Federation, along with others, argues for higher permanent exemptions to the tax, with some groups even calling for an abolition of it. The Farm Bill is a battleground for this issue, with provisions like the “special use valuation” being crucial to the farming community.
The Role of Land Trusts and Gifts: So what are the best ways to plan for succession for your operation? First, there are many farm succession planners who specialize in exactly this: helping farms transition to the next generation. For small fees, they write very detailed plans that allow operations to best plan based on their size and number of heirs. If you don’t want to pay for a professional there are other avenues as well:
Conservation Easements: Putting land in a conservation easement can reduce the taxable value of land, while preserving it for agricultural use. This can also yield income tax deductions. This process is facilitated by the USDA.
Land Trusts: Transfer assets into an irrevocable trust, which removes them from your estate. Types include:
Irrevocable Life Insurance Trust (ILIT): This can be used to own life insurance policies, ensuring the death benefit isn't part of the estate.
Grantor Retained Annuity Trust (GRAT): Allows the grantor to transfer asset appreciation out of the estate.
Charitable Remainder Trust (CRT): Provides income to beneficiaries for a term, with the remainder going to charity, offering tax deductions.
Tax-free gifts: Each individual can give up to $18,000 per person or $36,000 per married couple annually at the time of writing. The one-time lifetime Gift tax exemption is also $13.61 million per individual and $27.22 million for married couples. While both gifting methods can gradually reduce the size of an estate, it is important to note that the heir has to pay income tax on all gifts.
Life Insurance: Purchasing life insurance can ensure there's cash available to pay estate taxes without selling off assets. This should be done through an Irrevocable Life Insurance Trust to keep the policy out of the estate.
Family Limited Partnerships (FLPs) / LLCs: By transferring assets into an FLP or LLC, you can discount the value of your gifts due to lack of control or marketability, potentially reducing estate tax. This structure also protects assets from creditors.
Marital Deduction: Assets transferred to a surviving spouse are not subject to estate tax due to the unlimited marital deduction. However, this merely defers the tax until the death of the second spouse unless other planning is done
Our Take
The estate tax is more than a fiscal policy for American family farms; it's a determinant of their survival. To plan for the inevitable, it is important to consult with heirs as well as succession planners. Review every avenue that will help your unique operation, as every situation is different.
At Farmland Stock Exchange we want what’s best for the next generation, whether that be with our succession products or just offering our expertise on how to deal with different scenarios.
If you are in a situation like this, book a call with one of our founders here. If you know someone who is in a situation where they do not know how the farm will transition to the next generation, forward them this email and they can book a call.
Land Ledger Podcast
Exploring Leadership and Innovation in Agriculture with Justin McMenamy
In this episode of The Land Ledger, we’re joined by Justin McMenamy, host of the Grody & UnPrOfEsSiOnAL podcast and product-launch expert at Precision Planting. Together, we delve into the nuances of leading through change in one of the most dynamic and challenging industries—agriculture.
Justin shares his journey from the corporate world with Precision Planting to teaching and coaching through his podcast. The whole time highlighting the unique challenges and opportunities that come with serving farmers. He discusses his transition from working within a founder-led company to helping build an agile, collaborative leadership team that thrives in uncertain waters. His insights on leadership focus on empowering teams, solving problems without blame, and fostering trust to navigate growth and profitability.
We also tackle key topics, including:
The importance of understanding the values and lifestyles of farmers as customers.
The adoption curve in agriculture and its implications for innovation.
The role of patience and perseverance in driving sustainable growth in the ag industry.
Lessons Justin learned about transitioning from a founder phase to a scalable growth phase.
Justin’s candid stories about problem-solving, building customer trust, and creating scalable organizational cultures provide invaluable lessons for anyone in agriculture, startups, or leadership. Whether you’re an investor navigating ag cycles or a leader aiming to inspire your team, this episode is packed with actionable insights.
Don’t miss out on this conversation—it’s a masterclass in leadership and innovation, rooted in the real-world challenges of agriculture.
Catch the full episode now and subscribe to The Land Ledger for more inspiring conversations.
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