More farmland value will be gifted this year than ever before. The primary impetus for the rush is an expected change in the tax laws.
For 2012, all taxpayers are allowed to gift $5,120,000 (the lifetime exclusion amount). You can give more since the annual exclusion amount, currently $13,000, applies to each individual gift.
"This is a great opportunity
for farmers to transfer
highly appreciated land to
heirs with little or no gift
or estate tax liability."
For example, a farmer gives 160 acres of farmland, worth $1 million, to his four children. He can reduce this taxable gift by $52,000 (4 × $13,000), so his net gift is $948,000. If he makes no other taxable gifts during his lifetime, he would have a remaining lifetime exemption of $4,172,000. Once he exceeds $5,120,000 of total lifetime gifts, the excess is taxed at 35%.
This is the gift tax law now. The law reverts to a $1 million lifetime exclusion with a top tax rate of 55% on Jan. 1—hence the "gift land rush" of 2012. Several strategies exist to transfer taxable
wealth. I’ve outlined a few below.
Direct Cash Transfer. Simply write a check and you’re done. However, your children must be ready for a substantial cash gift. Once you make the gift, they can do anything they want with it.
Direct Land Transfer. The farmer gives undivided interests in the land. His children might treat
this as a co-tenancy or place their undivided ownership into a partnership. If the transfer leaves land owned by more than one party, he might be able to discount the gift. Other transfer methods could up the discount, thus decreasing the taxable gift.
FLP, LLC or LLP Unit Transfers. An FLP (family limited partnership), LLC (limited liability company) or LLP (limited liability partnership) is commonly used to transfer farmland value to children. Each allows the land to transfer in and out of an entity with little or no tax liability and provides a shield against personal liability for any debts of the entity.
Once an entity is formed, it can receive gifts. This should not be done without consulting estate and gift tax experts. Failure to follow technical procedures could result in the gift discount or the gift itself not being recognized. Back to our farmer: If he gifts $1 million of land to an entity and then transfers 40% of the units to his four kids, the discount might be 35%. Properly structured, the gift’s reporting value could go from $400,000 to $260,000.
Another benefit is the ability to allocate income. Most farmers want to make gifts but are concerned about having enough income to retire. By retaining an interest and using voting/nonvoting units, the farmer can manage retirement income. On the flip side, if too much control remains with the farmer, he could be penalized. Cash distributions should be made in accordance with ownership interests. Redemptions of the parents’ interests can skew cash toward the parents. Pay attention and abide by state excise taxes on transfers.
GRAT, GRUT, DGT and Others. For more sophisticated planning, farmers can set up a trust. There are many acronyms, but the goal of any trust is to reduce the gift value as much as possible while meeting the owner’s retirement needs and keeping farmland in family hands. If a "dynasty trust" is created, the family could retain the farm for 500 years or more.
It would require several more pages to explain all the mechanics; however, if your farmland value exceeds $5 million (about 500 acres debt-free), a trust might provide the best transfer option.
This is a great opportunity for farmers to transfer highly appreciated land to heirs with little or no gift or estate tax liability. A $5.12 million gift tax–free made this year would trigger a gift tax in excess of $2 million if made in 2013. With further appreciation in farmland values ahead, the time to act is now.
Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at firstname.lastname@example.org.
- December 2012