Estate taxes can complicate farm transitions
July 29, 2013
Welsh-born immigrant William R. Charles in 1868 fought an uphill battle with Indians and grasshoppers when he homesteaded 400 acres of well-watered crop and timberland in Republic County, Kan., that his great-grandchildren farm today.
The family's first log cabin burned to the ground in December, 1869, and they dug through two feet of frozen dirt to find shelter.
Today, Charles' grandchildren, great-grandchildren and their children are far flung from that homestead, Valley Point Farm, 240 miles northwest of Kansas City.
"But someone always comes back," said Mike Charles, a now-retired 71-year-old who with his brother John, and their 97-year-old mother Jean, are preparing for a fifth generation member to continue the family enterprise.
That would be 26-year-old Hayes Charles, John's son, who recently graduated Kansas State University with a milling science degree and now runs milling operations for a Carroll, Iowa, grain processor.
"I love my job," Hayes Charles said, "but I've always known I would be going back to Valley Point Farm."
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Until about six months ago, it appeared that the Charles family and unknown hundreds of thousands of other rapidly aging members of the nation's farm families faced challenges as daunting as the Indians and grasshoppers William Charles dealt with nearly 150 years ago,
Federal estate and gift tax laws — which had become steadily more lenient through first decade of the 2000s when land prices quadrupled in some parts of farming country — were scheduled to snap back to 2001 levels this year.
That would have triggered potential estate tax problems for anyone owning a one-square mile wheat field in Kansas, a corn field one-fourth that size in Iowa or a half square mile of Missouri farmland.
Farm and ranch estate taxes didn't go all the way over the fiscal cliff when Congress passed last some last-minute rules on Jan. 1.
Those allow $5 million of farmland and other property per person to pass estate-tax -free instead of $1 million that was the old limit in 2001.
That is effectively a $10 million exemption for married couples.
But the tax changes went far enough that farmers, ranchers, their families, their attorneys and their tax people all may want to put on another pot of coffee while they sort out the details.
Benefits of the new rules
The new rules benefit farmers and ranchers three ways, said Duane Hund, an extension farm management specialist at Kansas State University in Manhattan.
First, the $5 million exemption is indexed for inflation and already expanded to $5.25 million for 2013, Hund said. Potential taxes on property over that amount are capped at 40 percent, or about 10 percentage points lower than if Congress hadn't acted.
The third change is that the exemption is portable, Hund said. If a husband or wife dies and leaves an estate that is smaller than the $5.25 million exemption, the surviving widow or widower can add the unused amount to her or his own $5.25 million exemption at the second death.
"Portability is something new. We didn't have that before," Hund said.
The new law also allows farmers to transfer $5.25 million of their property during their lifetimes to another person tax-free.
Those outcomes may be better for farmers than returning to 2001 levels, but they are not simpler, said Dave Goeller, deputy director of the North Central Risk Management Education Center at the University of Nebraska-Lincoln.
That's because good estate planning for farmers and ranchers is more than tax management, Goeller said.
Good plans need to resolve legal issues, financial ones and the emotional ones of the participants too.
Multigenerational farm families today have members who've left the farm.
Many have some members who might want or need the financial windfall of a farm estate more than they value the family legacy.
And many also may have a son, daughter or other relative who wants to continue tilling the soil or running the ranch.
Those are situations that go beyond traditional estate planning and become a more immediate need for business succession planning, Goeller said.
"Fair often isn't the same as equal" in farm succession planning, he said. "But ultimately, it is hard to be a farmer without land." ❖
Gene Meyer is a former financial affairs reporter for The Kansas City Star, who also has covered agriculture for that news organization, The Wall Street Journal and the St. Paul (Minn.) Pioneer-Press, and contributes to Harvest Public Media. Harvest covers issues related to food and food production. For more information, go to harvestpublicmedia.org.