High Exposure: Understand How Record Farmland Prices Impact Your Estate Plan
When you hear of a new record sale of farmland it raises eyebrows — and your farmland’s worth. With this key asset rapidly increasing in value, you need to analyze your estate plan.
“All farmers undervalue their land,” says Randall Borkus, partner with Borkus Law Group. “They always think people overpay for farmland, but what neighbors pay is essentially the fair market value for your land.”
On average, he says, 80% of a farmer’s assets are tied up in farmland. This is important when it comes to planning. For 2022, the lifetime estate tax exemption is $12.06 million per person, meaning you won’t owe federal estate taxes for gifting that amount or less to children or other beneficiaries during life or at your death. You could owe up to 40% estate taxes on above that.
The exemption will adjust for inflation through 2025, but then it is expected to drop to nearly half of that ($6.5 million to $7 million) in 2026. “As a result, you could quickly have a tax exposure,” Borkus says.
ASSESS YOUR ASSETS
To understand your situation, start with an inventory of your assets and debts. “Essentially, create a rough balance sheet for your farm,” says Roger McEowen, agricultural tax expert at Washburn University School of Law.
As the planning process progresses, those estimates need to become specific.
“The only way to really determine what land is worth is to sell it,” Borkus explains. “If you’re not ready to sell it to find out the value, you have to have a formal appraisal.”
Another option is to compile farmland survey data from universities or farmland management companies. With reviewing sales data, McEowen suggests throwing out the outliers. Instead, watch the trend lines.
“Land values have in essence doubled in the last year or two,” he says. “For instance, if a 500-acre Iowa farm sells at $15,000 per acre, that’s $7.5 million.”
You want to review your plan when you have a change in your family or goals or when there’s a policy change. A doubling in your biggest asset easily qualifies.
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