The sunset of the Trump Tax Cuts is around the corner and might be here before farmers are ready for it. The current lifetime estate and gift tax exemption is $13.61 million but will be cut in half beginning in 2026. This means most farmers have about 18 months to make some major estate decisions.
Also, many don’t understand we have a base exemption ($6.8 million) and a bonus exemption. This means if a farm couple has a taxable estate about $13.6 million, it is much better to have one spouse give away wealth before you have the other spouse give anything (besides the current annual exclusion of $18,000 per donee).
Gifts are taken out of the base exclusion, which is what is left in 2026. The bonus exclusion disappears. As an example, assume Bill and Joan are worth $20 million. They are comfortable giving away $13 million and retaining the rest. If Bill and Joan each give $6.5 million, they will only be left with a lifetime exemption in 2026 of $300,000 plus inflation. However, if Bill gives away $13 million, he will have little exemption left in 2026, but Joan will have $6.8 million plus inflation.
How A Grat Works
One option farmers should consider is using a Grantor Retained Annuity Trust (GRAT) to transfer appreciating land to the next generation. A farmer places land (perhaps owned by an LLC, etc.) into the GRAT. In return, the farmer will be provided with an annual annuity payment (can be cash or a return of land based on the current fair market value).
We can structure the required annuity to create little or no taxable gift to the farmer. We can also set up the GRAT as a series of rolling two-year GRATs. The only downside to a GRAT is if the appreciation and income from the land is less than the required interest rate (currently 5.4%), then the farmer will not transfer any wealth to the next generation and will be out some administration fees.
A Brief Example
Assume Joan bought land for $6,000 an acre in 2020. She places the land into a two-year GRAT with an annual annuity payment of $3,190.29. She gets a cash distribution of $310 the first year, plus the land now has a fair market value of $12,000 per acre and transfers 0.24 acres back to herself worth $2,880. In year two, she receives $390 of cash plus
0.2 acres when the land fair market value is $14,000 per acre.
The net result is her heirs end up with 0.56 acres worth $7,840 per acre with no gift tax cost.
The example shown was easy to achieve from 2020 to 2022. It might take a few years to achieve the same result, but it will likely happen and could allow you to transfer land to the next generation with minimal gift tax consequences.
Discuss options with your tax adviser. TP
