There is no question that the number of family-run farms and ranches in America are on a fast decline. According to the United States Department of Agriculture (USDA) Farms and Land in Farms report, the number of farms has decreased by 137,500 farms in the past ten years. This can be attributed to many causes; such as loss of interest in the upcoming generations, or farmers and ranchers struggle to earn what they need to live. There is also one big reason these operations are declining that many do not think about, and that is the estate tax.
The estate tax, also known as the “death tax”, is a tax placed on the deceased’s estate when it is passed down to the heir. In plain words, when a farm or ranch is passed on to the next generation, a steep tax can be placed on the estate if it is large enough to not be exempt. This is what leads operations to be parted out and often sold-off, and makes farm succession very difficult.
What the Estate Tax Was
Originally, the exemption was $5.49 million per person. If a person’s estate is valued at less than that amount, they are exempt from the estate tax. If the estate is worth more, it will be taxed for the amount over the $5.49 million, at a rate of 40 percent. For example, if I was an heir to my father’s ranch that is worth $10 million, I would be taxed for the $4,510,000 that is over the exemption level. At a tax rate of 40 percent, I would pay $1,804,000 in taxes just to inherit an operation that has been left for me.
What the Estate Tax Is Now
The Tax Cuts and Jobs Act was passed at the end of 2017 and increased the tax exemption level. The new exemption level went into effect on Jan. 1, 2018, and raised the exemption level to $11.2 million. With this increase, my father’s estate of $10 million would fall under the $11.2 million amount, and I would be exempt from paying a high tax on the estate. This means I would not have to pay almost $2 million in taxes!
What the New Estate Tax Means
The increased tax exemption means more operations can be passed down without having to incur a tax. This can help to keep family-owned farms and ranches intact and successful. Many families were resorting to piecing out sections of land, or resisting the growth of the operation, just to keep the value small and under the original $5.49 million exemption level. This caused many operations to deny opportunities that could have exponentially grown their business, which led to missed income. One thing that did not change about the estate tax in the Tax Cuts and Jobs Act is the timeframe to pay the tax. Heirs have nine months to pay the tax, and in some cases this time frame can be expanded to 15 years, if you qualify.
Estate taxes play a large role in farm succession planning for families. Hopefully with the exemption level almost doubling, it can take away some of the burden of losing a loved one.