Our first legislation around a possible capital gains tax at death is called the Sensible Taxation and Equity Promotion (STEP) Act. Normally I would say this has little chance of passing Congress, but times are not normal, and I predict many of these proposals could pass.
The STEP Act proposes a “transfer” tax anytime a person transfers appreciated assets to another person or into a nongrantor trust. Transfers to spouses and charities would be exempt.
An exemption of $1 million is allowed per person but during a lifetime only $100,000 is tax-free. There appears to be no annual $15,000 exclusion.
TRUSTS AND TRANSFERS
Many farmers elect to gift grain to their kids or grandkids. The STEP Act will eventually make most of that gift taxable to the farmer and subject to self-employment taxes.
Dynasty trusts, which allow farms to remain in a trust for multiple generations, currently escape income and estate taxes on any appreciation. But, the STEP Act provides for an income tax on any appreciation on trust assets every 21 years. For example, any trusts created before 2005 will pay this tax in 2026.
Farmers have used intentionally defective grantor trusts to allow assets to bypass estate taxes, and the grantor can sell assets to the trust in return for payments not subject to income tax. The STEP Act eliminates this option. Because the asset did not get a step-up on the “sale” it will be subject to tax when the 21-year period ends.
Transfers of liquid assets will be taxed immediately, whereas transfers of illiquid assets (such as farms) allow for payments over 15 years. However, if a lien is filed and if you want to finance that property, a bank will likely require you to pay off the IRS debt.
Any income tax owed at death would be allowed as a deduction against federal estate taxes. This effectively contin-ues the step-up in basis at death but at the cost of paying a transfer tax.
Much of this tax will likely be at the highest tax rate since much of a farmer’s appreciated assets are grain invento-ries, receivables and equipment, which are taxed as ordinary income.
HIT PAUSE ON GIFTS
I would say the most drastic part of the STEP Act is it applies to all transfers after Dec. 31, 2020.
As such, farmers looking at making large gifts this year should hit pause until we see how this ends up.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA. He grew up on a farm in central Washington and still resides in the state.
