All in the Family? How the American Families Plan Could Impact Your Succession Plan

In Late April, President Joe Biden announced the American Families Plan. It provides direct and indirect benefits to families. It also raises a lot of key questions for farmers and their succession plans.

The USDA fact sheet about the tax reform proposal states: Part of this plan to make sure the wealthy pay their fair share is a proposal to close the “stepped-up basis” loophole for wealthy estates so that enormous fortunes do not completely escape taxation. Under the proposal, unrealized capital gains (those that have never been previously taxed) are taxed at death above $2 million in gains per couple. But this won’t affect family farms that stay in the family.

So, if you keep the farm in the family, it's going to be exempt from tax. But what does that mean?

Chris Hesse and Paul Neiffer, both CPAs and principals with CLA worry this isn’t as simple and straightforward as it sounds.

“Just because the farm stays in the family, a transfer tax may still apply,” Neiffer says. 

Watch a video where Hesse and Neiffer discuss the American Families plan. 

“The legislation all sounds really good that as long as the heirs continue to farm the ground, this tax won't hit,” Hesse adds. “But what if not all of your heirs are going to farm the ground? We all know many parents want to treat their kids equally.”

For example, you have four kids. If all of your assets are tied up in the farm, how do you transfer ownership of the farm to the three non-farming heirs? 

There’s a chance, Hesse says, the non-farming heirs may have to pay a transfer tax of some kind. 

The other big detail is the definition of “family.”

“Currently, under many parts of the Tax Code, family does not include nephews, nieces and cousins,” Neiffer says. “Therefore, if an uncle leaves the land to his two nephews since he has no kids, a transfer tax may apply.”

“There needs to be a little bit bigger definition of family in order to truly protect that family farm from this from this income tax on death,” Hesse adds.

Also, what is the time period? Does the farm have to stay in the family for 10 years, 20 years, a lifetime?

“We know this bill won't pass as is, but it is going to be discussed and we know that if it's going to happen, it's got to happen this year because next year is an election year,” Neiffer says. “Our hope is that none of its retroactive and it will be effective January 2022, so we have some time to do appropriate planning.”

Neiffer and Hesse encourage farmers to talk to their tax advisors now to determine how they should change or adapt their succession plan due to the American Families Plan.

“We may have a very busy planning season at the end of 2021, and my warning is to be prepared and be nimble to act if something really drastic happens,” Hesse says. “If there's going to be major tax legislation changing these long-held concepts, it'll be this year. So, be cautious and be prepared for it.”

Farm CPA Paul Neiffer highlights some of the important details on the Top Producer Podcast: 

Watch a video where Hesse and Neiffer discuss the American Families plan.