The Cultivating Connections Conference, an annual event dedicated to farm transition planning, is returning for its second year on August 5th and 6th, 2024. This year’s conference will be held at the University of Cincinnati College of Law and will convene farm transition planners—attorneys, accountants, educators, and other professionals—from across the country.
Cultivating Connections serves as a forum for learning, discussing, and collaborating on the latest strategies, tools, and legal and tax aspects of farm transition planning. The conference fosters a supportive community dedicated to preserving the legacy and sustainability of family farms for future generations.
Conference Highlights:
In-depth sessions and workshops: Featuring a real-life case study, the conference delves into practical farm transition planning techniques, estate planning considerations, and tax implications.
Networking opportunities: Attendees can connect with peers, share experiences, and build relationships with a network of farm transition professionals.
Expert speakers: The conference brings together a distinguished faculty of attorneys, accountants, professors, and other professionals who share their knowledge and insights.
The Association of Farm Transition Planners: This newly formed association offers ongoing support and resources for farm transition professionals beyond the conference.
Registration and More Information
For detailed information about the Cultivating Connections Conference agenda, speakers, and registration, please visit https://go.osu.edu/cultivatingconnectionsor use the QR code below. For more information or questions, contact Robert Moore (moore.301@osu.edu).
About the Cultivating Connections Conference
The Cultivating Connections Conference is a partnership between The Ohio State University Agricultural & Resource Law Program, Iowa State University Center for Agricultural Law & Taxation, and the National Agricultural Law Center.
One of the primary challenges for a retiring farmer is the large tax burden that retirement may cause. Throughout their farming careers, farmers do a good job of managing income taxes, in part, by delaying sales and prepaying expenses. This strategy works well while the farm is operating but can cause significant tax liability upon retirement. The combination of a large increase in revenue from the sale of assets and little or no expenses to offset the revenue can cause a retiring farmer to be pushed into high tax brackets. It is not unusual for 40% or more of the sale proceeds from a retirement sale to go to taxes. One strategy to reduce income tax liability at retirement is a Charitable Remainder Trust (CRT). A CRT can be an effective way of managing income taxes at retirement, but it is not for everyone.
A CRT is a charitable trust because at least some of the assets in the CRT must eventually pass to a qualified U.S. charitable organization such as a church or 501(c)(3) corporation. This charitable nature of the CRT is central to the CRT strategy. As a charitable trust, the CRT may sell assets without paying tax on the sale. So, instead of the retiring farmer selling assets in their own name, they donate the assets to the CRT and then the CRT sells the assets. The retiring farmer then receives an income stream from the CRT. After a period of time, the income stream stops and the remaining trust assets are contributed to the named charity. The following are the steps of the CRT strategy:
Assemble a team of advisors and develop a CRT strategy.
Donor establishes a CRT. The trust document declares the income beneficiaries and the charitable beneficiaries.
Donor determines the assets to be contributed to the CRT.
Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
The CRT sells the assets but does not pay tax.
The Trustee of the CRT uses the sale proceeds to establish an annuity. The annuity must be designed to provide at least 10% of the sale proceeds to the charity.
The annuity pays out to the Donor over a number of years. The Donor pays income tax on the annuity distributions.
When the trust is terminated, the charity is paid the remaining assets.
CRTs are best used in situations where the retiring farmer does not have a successor and must sell all operating assets. CRTs should generally not be used when the farming operation is to be passed along to the next generation. A CRT can be an excellent strategy to help a retiring farmer reduce income tax liability and provide a charitable donation but it is not for everyone. Be sure to consult with your team of advisors before deciding upon or implementing a CRT.
Many of Ohio’s farm markets, u-picks, farm petting zoos, and other “agritourism” operations are preparing to open for their spring and summer activities. While these types of agritourism activities are popular, they raise unique liability concerns. That’s because there is always the risk of an injury or harm when bringing people onto the farm, whether allowing them to be near animals, riding on equipment, in crop and orchard areas, or engaging in physical activities. Along with readying the farm for the new season, agritourism operators should also plan for the possibility of a liability incident.
Here are five actions agritourism providers can take to manage liability risk.
Conduct a safety review. Inspect your operation with visitor safety in mind. Remember, many visitors have never been on a farm or don’t understand what might harm them on a farm. Examine all areas visitors will be in, including surrounding “off limits” areas visitors might try to access, and identify any possible safety hazards. Pay extra attention to areas children will use. Consider these questions:
Are the facilities, fences, gates, steps, play areas, and other structures in good repair?
Are doors and gates working and latching properly?
Are pesticides, herbicides, or chemicals out of sight and inaccessible?
Are animal enclosures sound, do any “dangerous” animals need to be fully off limits to visitors, and are there handwashing stations near animal contact areas?
Are there any accessible dangers that might attract children, such as ladders, equipment, lagoons, large tractor tires, and wells?
Are parking areas and walkways sufficiently sized and buffered from traffic?
Look for the potential dangers, then take actions such as making repairs; installing blockades, fences, locks, or other structures to keep visitors away; putting up signs and warnings; providing instructions or maps; expanding parking areas or walkways; and removing unnecessary dangers.
Complete our Agritourism Ready course. Be prepared for the possibility of an emergency situation—both natural and man-made disasters can raise the need for an emergency response. How an operation responds to an emergency can reduce harm to visitors and ultimately affect the operation’s risk of liability or harm. OSU offers a curriculum that helps agritourism operations reduce risks by developing an emergency management plan. Access this valuable and free resource at https://u.osu.edu/agritourismready/.
Train employees. A business is legally responsible for the negligence of its employees, so it’s important to reduce the risk that an employee’s actions will cause or contribute to a visitor’s harm. Provide thorough safety training to agritourism employees. Make sure employees know how to do the job, including activities like operating equipment, maintaining and cleaning visitor areas, handling animals, overseeing children, and responding to a safety incident.
Obtain agritourism insurance coverage. Insurance is an excellent liability management tool. But be aware that a typical farm insurance policy does not cover agritourism activities, and a separate endorsement or policy may be necessary. Even if a farm has a separate endorsement for agritourism, it’s still important to ensure that any new agritourism activities fall under the agritourism coverage. Now is the time to schedule a visit with the insurance provider and review the insurance policy. Don’t be secretive about what you’re doing in your operation. Share all activities with the provider and ensure that each activity is covered by the policy. If an activity is not covered or will require costly additional coverage, weigh the risk, costs, and benefits of continuing to offer the activity.
Install the Ohio agritourism immunity sign. I’ve been surprised recently by how many operations I’ve visited that do not have an agritourism immunity sign on display. Posting the sign is a critical risk management tool. That’s because Ohio law provides civil immunity for qualifying agritourism providers if a visitor suffers harm or injuries due to the “inherent risks” of being on a farm. To receive the immunity, however, an agritourism provider must post the required agritourism immunity sign at the entrance to or near the agritourism activities. The agritourism immunity sign warns visitors that the operation is not liable for harm from inherent risks and that they are assuming the risk of participating in agritourism activities. But while it’s an important tool, don’t let the sign replace all of the other recommendations provided in this article. Read more about the immunity law and the agritourism immunity sign in our law bulletin, Ohio’s Agritourism Law, available on farmoffice.osu.edu.
Agritourism is a thriving industry in Ohio. Taking legal precautions to manage liability risk will help ensure that agritourism remains an important component of Ohio agriculture. To learn more about legal issues in agritourism, visit OSU’s Agritourism Law Library on the Farm Office website at farmoffice.osu.edu/law-library.
Retirement means different things to different farmers. For some, retirement is the slow, gradual process of turning over the farming operation to the next generation. For others, retirement may be the immediate sale of operating assets when there is not an heir to take over the farming operation. Regardless of the type of retirement, operating assets will often be transferred. This article will discuss the different strategies to transfer operating assets and the implications of each strategy.
Strategy #1. Gifting
The gifting of assets is the simplest transfer strategy. Gifting works best when the assets are being transferred to a family member and no income is needed from the assets. While gifting may seem like the obvious best solution if transferring to a family member, there are significant negative tax implications to gifting that should be considered.
Advantages
Simple
Ownership is transferred relieving owner of liability and responsibility for repairs and maintenance
Helps next generation
Disadvantages
No income to owner
Loss of stepped-up tax basis
Strategy #2. Outright Sale
When income is needed from operating assets, a sale may be the best transfer strategy. Because many operating assets are untitled, a sale can be completed rather easily. The buyer provides the funds and the sale is completed. An outright sale is considered to be a sale that involves all assets being transferred simultaneously with a payment for the entire sale.
Advantages
Creates income
Relieves owner of liability and maintenance responsibilities
Disadvantages
Tax liability is usually significant due to little or no tax basis and depreciation recapture
Will use resources of next generation of farmer
Strategy #3. Gradual Sale
Instead of an outright sale, assets can be sold gradually, over time. Usually in this strategy, a few items are sold each year until transfer is complete. The sales can happen somewhat uniformly each year or be adjusted as the seller needs income and/or the buyer has available resources to purchase.
Advantages
May help keep seller in lower income tax brackets by spreading out income
Relatively simple
Disadvantages
Owner must wait to receive income for all assets
Owner retains some ownership and thus retains some liability and responsibility for maintenance
Strategy #4. Installment Sale
An installment sale involves the sale of the assets with payment being made over a number of years. This strategy may seem attractive as a way to sell assets and spread income over time. However, an installment sale is often the worst strategy when selling operating assets because the IRS requires all depreciation recapture taxes to be paid in the first year of the installment sale. Be sure to discuss an installment sale with your tax advisor before implementing this strategy.
Advantages
Transfers ownership immediately to eliminate liability and maintenance
After the taxes are paid in year 1, little or no taxes may be owed on the remaining payments
Disadvantages
All depreciation recapture tax is due in the first year of the installment sale
Risk of buyer not making payments
Strategy #5. Lease with Purchase Option
A lease allows payments to be spread over the term of the lease with taxes due upon receipt of each payment, rather than all due up front. The person leasing the machinery can then be given the option to purchase the machinery upon the expiration of the lease. For the retiring farmer who needs income from their machinery, this is a strategy worth exploring.
Advantages
Spreads income and tax liability over the term of the lease
May help cash flow for buyer and lease payments are a deductible expense
Disadvantages
Ownership is retained so remain liable for the asset
The “Buyer” does not own the asset so cannot use as collateral
It can be complicated to determine lease rates when machinery is traded, replaced or sold
Strategy #6. Integrating a Business Entity into the Transfer Plan
Using a business entity, such as a limited liability company (LLC) , for the transfer of operating assets can have multiple benefits. An LLC can reduce liability exposure, simplify the transfer process, and reduce tax liability. Anyone transferring operating assets should consider incorporating an LLC into the process.
Advantages
Will provide liability protection for the owner of the assets
Sale of entity ownership is usually considered a capital gain which is taxed at lower rates
Disadvantages
Can cost up to several thousand dollars to set up
Business entity requires management such as accounting, bank accounts and tax returns
Strategy #7. Charitable Remainder Trust
A Charitable Remainder Trust (CRT) can be an excellent strategy for the retiring farmer to sell operating assets without immediate tax liability, receive a long-term flow of income and make a charitable contribution. The strategy involves establishing a charitable trust, transferring operating assets to the trust, then selling the assets through the trust. Due to the charitable nature of the CRT, no tax is due upon the sale of the assets. The CRT then establishes an annuity for the retiring farmer which generates annual income. At the termination of the CRT, the remaining principal in the CRT is donated to the charitable beneficiary. The CRT strategy is the most complicated strategy and will require the most legal and accounting fees.
There are several strategies that can be implemented to transfer operating assets at retirement. There is no perfect strategy, each one has advantages and disadvantages. A thorough analysis of the implications to income, taxes, liability and cash flow of each strategy should be performed before deciding on the preferred strategy. Working with knowledgeable tax and legal counsel can help with the decision-making process and reduce the chances of unwanted or unexpected outcomes.
As April comes to a close, we bring you another edition of the Ag Law Harvest. This month’s harvest brings you laws and regulations from across the country regarding a national drinking water standard, the Endangered Species Act, Ag-Gag laws, noncompete agreements, and pollution.
EPA Finalizes First-Ever PFAS Drinking Water Standards Earlier this month, the U.S. Environmental Protection Agency (“EPA”) announced a final rule, issuing the “first-ever national, legally enforceable drinking water standard to protect communities from exposure to harmful per-and polyfluoroalkyl substances (PFAS), also known as ‘forever chemicals’”. The final rule sets legally enforceable maximum contaminant levels for six PFAS chemicals in public water systems. The EPA also announced nearly $1 billion in new funding to “help states and territories implement PFAS testing and treatment at public water systems and to help owners of private wells address PFAS contamination.” The EPA suggests that this final rule “will reduce PFAS exposure for approximately 100 million people, prevent thousands of deaths, and reduce tens of thousands of serious illnesses.”
Interior Deptartment Finalizes Rule to Strengthen Endangered Species Act The Department of the Interior has announced that the U.S. Fish and Wildlife Service finalized revisions to the Endangered Species Act (ESA). These revisions aim to enhance participation in voluntary conservation programs by promoting native species conservation. They achieve this by clarifying and simplifying permitting processes under Section 10(a) of the ESA, encouraging greater involvement from resource managers and landowners in these voluntary initiatives. For more information about Section 10 of the ESA visit the U.S. Fish and Wildlife Service’s website.
Kentucky Passes Ag-Gag Statute On April 12, 2024, the Kentucky legislature overrode the governor’s veto to pass Senate Bill 16 into law. The new law, titled “An Act Relating to Agricultural Key Infrastructure Assets,” expands the definition of “key infrastructure assets” to include commercial food manufacturing or processing facilities, animal feeding operations, and concentrated animal feeding operations. It criminalizes trespassing on such properties with unmanned aircraft systems, recording devices, or photography equipment without the owner’s consent. The first offense is a Class B misdemeanor with up to 90 days imprisonment and a $250 fine, while subsequent offenses are Class A misdemeanors with up to 12 months imprisonment and a $500 fine.
Federal Trade Commission Bans Non-Compete Agreements The Federal Trade Commission (“FTC”) announced a final rule banning noncompete agreements and clauses nationwide. This move aims to promote competition by safeguarding workers’ freedom to change jobs, increasing innovation and the formation of new businesses. Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. However, existing noncompetes for senior executives – those earning more than $151,164 annually and in policy making positions – remain enforceable under the new rule. Employers will have to notify workers bound to an existing noncompete that the noncompete agreement will not be enforced against the worker in the future. The final rule will become effective 120 days after publication in the Federal Register.
EPA Announces New Rules to Reduce Pollution from Fossil Fuel-Fired Power Plants The U.S. Environmental Protection Agency (“EPA”) unveiled a set of final rules designed to decrease pollution from fossil fuel-fired power plants. These rules, developed under various laws such as the Clean Air Act, Clean Water Act, and Resource Conservation and Recovery Act, aim to protect communities from pollution and improve public health while maintaining reliable electricity supply. They are expected to substantially reduce climate, air, water, and land pollution from the power industry, aligning with the Biden-Harris Administration’s goals of promoting public health, advancing environmental justice, and addressing climate change.
By: Jeffrey K. Lewis, Esq. Program Coordinator Income Tax Schools at The Ohio State University
Spring has officially sprung, and so have a few interesting legal updates. In this edition of the Ag Law Harvest we cover aggravated vehicular assault in a farm utility vehicle, “Made in the USA” labels, the Corporate Transparency Act’s legal woes, USDA’s Dairy Margin Program, and the U.S House Committee on Agriculture’s Agricultural Labor Working Group’s final report.
Driver of Farm Utility Vehicle Cannot be Found Guilty of Aggravated Vehicular Assault. The Supreme Court of Ohio ruled that a driver of a farm utility vehicle involved in a crash cannot be convicted of a felony for injuring passengers because the vehicle does not meet the definition of a “motor vehicle” under Ohio’s criminal code. Joshua Fork of Sandusky County crashed his Polaris utility vehicle while driving under the influence at a party in 2020. Two of Fork’s passengers sustained serious injuries as a result of the accident. Fork was convicted of operating a vehicle under the influence (OVI), and two counts of aggravated vehicular assault. Fork did not contest his OVI conviction but did appeal his aggravated vehicular assault conviction to the Sixth District Court of Appeals. The case eventually made its way to the Supreme Court of Ohio.
In its decision, the Court found that Ohio law has two definitions of “motor vehicle.” One definition applies strictly to traffic laws and the other applies more broadly to Ohio’s “penal laws.” The Court held that the definition of “motor vehicle” that applies to penal laws, such as aggravated vehicular assault, exempts utility vehicles. The Court concluded that because of the utility vehicle exemption and the fact that the utility vehicle’s principal purpose is for farm activities, Fork cannot be found guilty of vehicular aggravated assault. To read more on the Supreme Court’s decision, visit: https://www.courtnewsohio.gov/cases/2024/SCO/0321/230356.asp
USDA Announces Final Rule on “Made in the USA” Labels. The U.S. Department of Agriculture (“USDA”) announced the finalization of a rule to align the voluntary “Product of USA” label claim with consumer understanding of what the claim means. The USDA’s final “Product of USA” rule permits the voluntary use of the “Product of USA” or “Made in the USA” label claim on meat, poultry, and egg products. However, these labels can only be used if the products are derived from animals that were born, raised, slaughtered, and processed in the United States. The rule aims to prevent misleading U.S. origin labeling, ensuring that consumers receive truthful information about the origins of their food.
Under the final rule, the “Product of USA” or “Made in the USA” label claim will remain voluntary for meat, poultry, and egg products. It will also be eligible for generic label approval, meaning it won’t require pre-approval by the USDA’s Food Safety and Inspection Service (“FSIS”) before use, but establishments must maintain documentation supporting the claim. Additionally, the rule permits other voluntary U.S. origin claims on these products, provided they include a description on the package of the preparation and processing steps that occurred in the United States upon which the claim is made.
Corporate Transparency Act Loses First Federal Court Battle. As we have previously reported (here), the Corporate Transparency Act (“CTA”) requires certain business entities to file Beneficial Ownership Information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”) or face civil and criminal penalties. However, an interesting twist in the CTA saga has occurred. A federal court in Alabama issued an opinion ruling the CTA unconstitutional, concluding that the CTA exceeds the U.S. Constitution’s limits on Congress’s power, and issued an injunction against the U.S. Government from enforcing the CTA against the named plaintiffs in the case. Therefore, the named plaintiff, Isaac Winkles, and companies for which he is a beneficial owner or applicant, the National Small Business Association, and the approximately 65,000 members of the National Small Business Association are currently not required to report beneficial ownership information to FinCEN. Everyone else must still comply with the CTA and the BOI reporting requirements.
FinCEN released a statement acknowledging the court’s ruling but emphasized that only the named plaintiffs are excused from reporting beneficial ownership information to FinCEN at this time. On March 11, 2024, the U.S. Government filed a notice of appeal of the lower court’s ruling, hoping to reverse the injunction and the court’s decision. We will continue to monitor the situation and keep you informed of any updates to the CTA and BOI reporting requirements.
USDA Announces 2024 Dairy Margin Coverage Program. The U.S. Department of Agriculture (“USDA”) announced that starting February 28, 2024, dairy producers in the United States can enroll in the 2024 Dairy Margin Coverage (“DMC”) program. Enrollment for the 2024 DMC coverage ends on April 29, 2024.
The USDA’s Farm Service Agency (FSA) has made revisions to the DMC regulations to allow eligible dairy operations to make a one-time adjustment to their established production history. This adjustment involves combining previously established supplemental production history with DMC production history for dairy operations that participated in Supplemental Dairy Margin Coverage in previous coverage years. DMC has also been authorized through the calendar year 2024 as per the 2018 Farm Bill extension passed by Congress.
FSA Administrator Zach Ducheneaux encourages producers to enroll in the 2024 DMC program, citing its importance as a risk management tool. The program has proven effective, with over $1.2 billion in Dairy Margin Coverage payments issued to producers in 2023. Ducheneaux highlights the program’s affordability, noting that it offers a sense of security and peace of mind to producers.
DMC is a voluntary risk management program that provides protection to dairy producers when the margin between the all-milk price and the average feed price falls below a certain dollar amount selected by the producer. In 2023, DMC payments were triggered in 11 months, including two months where the margin fell below the catastrophic level of $4.00 per hundredweight, marking a significant development for the program.
House Committee Releases Final Report Recommending Changes to H-2A Program. On March 7, 2024, the U.S. House Committee on Agriculture’s Agricultural Labor Working Group (“ALWG”) released its final report containing policy recommendations for U.S. agricultural labor. The report includes significant reforms to the H-2A program, many of which, as announced by the ALWG, received unanimous support from the bipartisan working group. The recommended policies encompass creating a single H-2A applicant portal, implementing H-2A wage reforms, establishing a federal heat standard for H-2A workers, and granting year-round industries such as livestock, poultry, dairy, peanuts, sugar beets, sugarcane, and forestry access to the H-2A program.
Think about your key farm advisors. You likely have regular conversations with your agronomist, veterinarian, equipment dealer, and grain buyer throughout the year. But when was the last time you spoke with your insurance agent?
For many farmers, insurance agents fall outside their regular circle of communication. This can be a risky oversight. Here’s why regular contact with your insurance agent is crucial:
Proactive Protection: Unlike other advisors you might consult reactively for problems, your insurance agent plays a preventative role. They ensure your farm has the right coverage to bounce back from unexpected events.
Customized Coverage: Farms are unique operations. A good insurance agent will understand your specific risks and tailor your policy accordingly. This could involve covering unique assets, activities, or environmental concerns.
Maximizing Coverage: Insurance policies can be complex. Regularly reviewing your policy with your agent helps ensure you understand your coverage details, including property value limits, replacement options, and liability protection levels.
Take Action Today: Schedule an Insurance Review
Here are some talking points to get the conversation started with your agent:
Policy Review: Go over your current coverage thoroughly. Are all your farm properties and assets listed accurately? Are the listed values up-to-date to reflect true replacement costs?
Coverage Gaps: Discuss any unique farm activities or assets that might require additional coverage beyond your current policy.
Liability Needs: Evaluate your current liability coverage. Is it sufficient for your operation?
An Investment in Peace of Mind
An hour or two spent with your insurance agent can make a world of difference in the event of a loss. They can be your partner in safeguarding your farm’s financial future. Don’t wait until a problem arises; take charge today and schedule a comprehensive insurance review.
Estate taxes are receiving a lot of attention due to the impending reduction in the federal estate tax exemption in 2026. If Congress does not extend or make permanent the current estate tax exemption, the exemption in 2026 will be $5.5 million per person plus inflation. The inflation-adjusted estate tax exemption for 2026 is expected to be between $7 million and $7.5 million. The current federal estate tax exemption for 2024 is $13.61 per person.
The lower federal estate tax exemption will still be high enough for most people to avoid federal estate taxes. However, some farmers will see themselves move into the federal estate tax bracket in 2026. People who will find themselves subject to estate taxes due to the 2026 sunset provisions are exploring strategies to help reduce estate tax liability.
One such strategy that may be considered is gifting. In some situations, gifting can help reduced estate taxes. In other situations, it may have little effect and have detrimental effects on income tax strategy. This article will discuss how gifting may or may not help with estate tax liability and the implications of gifting.
Annual Gifts
One gifting strategy to help reduce estate taxes is using the annual gift exclusion. As stated above, multiple gifts of up to $18,000 can be made without tax to either party. The gifts can be money, shares in a business entity, real estate or almost any other kind of asset. The annual exclusion gift can be an effective strategy for those people who have many potential recipients for the gift and/or may be close to or just over the federal estate tax exemption. Consider the following example:
Grandma has 10 grandchildren. She calculates that she will be about $200,000 over the estate tax exemption in 2026. She gifts each grandchild $18,000 in both 2024 and 2025. The gifts allow Grandma to gift a total of $360,000.
This gift allowed Grandma to move back under the estate tax exemption and avoid estate taxes. Neither Grandma nor grandchildren will pay gift taxes on the gift. As the example shows, using the annual gift exclusion can be an excellent way to reduce or eliminate estate taxes.
The primary limitation to the annual exclusion gift strategy is that it may have limited effect for people who are significantly over the federal estate tax limit. While $18,000 is not a small amount of money to gift, it may be too small to make much of an impact on estate taxes of higher wealth people. Let’s continue the previous example with a change of facts:
Grandma’s net worth will be $2,000,000 million over the exemption in 2026.
Even though Grandma can gift $180,000 each year to her grandchildren, it will take 12 years for Grandma to gift away $2,000,000. Additionally, her net worth will likely increase each year. In fact, the increase in net worth may outpace what she is able to gift each year. While annual gifting will always help reduce potential estate taxes, this strategy may only be moderately helpful for higher wealth people.
Lifetime Credit Gift
Another strategy is to make large gifts more than the $18,000 annual exclusion gift. As discussed above, large gifts can be made without paying gift tax. However, the estate tax exemption is reduced by the amount of the gift. So, making lifetime credit gifts are offset dollar-for-dollar by a reduction in the estate tax exemption. However, this strategy can still be effective when gifting assets that are expected to appreciate in value. Gifting these assets keeps the appreciation out of the Giftor’s estate. Consider the following example:
Grandma owns the Smith Farm that sits next to town. It is currently valued at $1,000,000. She expects commercial development pressure to cause the value of the Smith Farm to increase to $3,000,000 in the next few years. Grandma decides to gift the Smith Farm to their grandchildren.
Grandma can gift the Smith Farm without paying gift taxes. Her federal estate tax exemption will be reduced by $2,000,000. So, the gift itself does not help her estate tax situation. However, when the Smith Farm increases in value by $2,000,000, that appreciation in value will be assumed by the grandchildren. Grandma has essentially been able to gift $3,000,000 out of her estate while only using up $1,000,000 of her estate tax exemption.
This strategy may not be the best strategy for assets that will have no or little appreciation. For a non-appreciating asset, the gift just comes off the estate tax exemption and does not help the estate tax situation. Again, large gifts work best with appreciating assets.
Capturing the Higher Lifetime Credit
As stated previously, the current lifetime credit gifting allowance is $13.62 million which will decrease by about one-half in 2026. So, there is an opportunity to make a very large gift now and capture the large gift allowance before it is reduced. Consider the following example:
Grandma has a net worth of $20,000,000. She is concerned she will be over the estate tax exemption limit by $13,000,000 in 2026 resulting in around $5,000,000 of estate taxes. To avoid these taxes, Grandma gifts $13,620,000 of land to her grandchildren in 2024.
In this scenario, Grandma is able to gift her entire lifetime credit which reduces her estate tax exemption is to $0. But, when the estate tax exemption is reduced to $7,000,000 in 2026, there will be no claw back of her gift. That is, her estate tax exemption will remain at $0 and the IRS will not seek to recoup any of the 2024 gift exceeding $7,000,000. So, Grandma is able to gift $13,620,000 in 2024 and there is no claw back of the extra $6,620,000 in 2026 when the exemption is reduced. Grandma’s net worth is reduced to $6,380,000, which will be less than the 2026 exemption amount, and therefore Grandma has avoided all estate taxes without paying any gift taxes.
Obviously, this strategy only works for very high wealth individuals. The person must have enough assets to gift more than the full exemption amount and still have adequate assets remaining to support themselves. Most people do not have enough wealth to make this strategy work, but for those that do, it can be very effective.
Gifting Has Negative Tax Consequences
Gifting eliminates the opportunity of stepped-up basis at death. This important concept of stepped-up tax basis at death is a tremendous financial benefit to the beneficiary receiving the asset from the estate. Careful consideration should be given to this loss of stepped-up basis before a gifting strategy is implemented. For more information on gifting and stepped-up basis, see the Gifting Assets Prior to Death publication available at farmoffice.osu.edu.
Seek Legal and Tax Advice
Making gifts, particularly large gifts, have significant legal and tax consequences. Before implementing a gifting plan, be sure to consult with legal and tax advisors to explore all options and to understand the implications of different strategies. While gifting may seem like a simple solution to estate taxes, gifting is often complicated and has complex legal and tax consequences that should be carefully considered.
Are you a baker ready to sell your home-baked goods? Are you a farmer looking for value-added opportunities for crops you’ve grown or livestock you’ve raised? Are you an entrepreneur aiming to use local agricultural products to make value-added foods?
If you’ve answered yes to any of these questions, then the new Food Business Central online course can equip you with knowledge and strategies to launch a successful farm-raised or home-based food business in Ohio.
Navigating food regulations, establishing a new business, and applying best practices for food safety can be challenges for food entrepreneurs. This course is designed to serve as a centralized hub to connect you to information and resources regarding all types of food products you might want to make and sell.
We’re part of the teaching team that created the course, which also includes Emily Marrison, OSU Family & Consumer Sciences Educator, Nicole Arnold, OSU Food Safety State Specialist,and Garth Ruff, OSU Field Specialist in Beef Cattle and Livestock Marketing. Our goal is to help food business entrepreneurs start off organized, safe, compliant, and strategic. The self-paced course asks key questions with considerations to explore and actions to take on your journey to start a food business. The cost of the course is $25, and registration is at go.osu.edu/foodbusinesscentral .
The Food Business Central online course was partly funded through North Central Extension Risk Management Education, whose goal is to help farmers and ranchers effectively manage risk in their operations. This assistance comes from the United States Department of Agriculture through the National Institute of Food and Agriculture.
As we enter the 2024 crop season, it’s time for an update on economic and legal information that affects Ohio farmland leasing. Join our Farm Office team members on March 1, 2024 from 10 a.m. until noon for a special edition of our Farm Office Live webinars. In the Ohio Farmland Leasing Update, we’ll be sharing the latest information on these leasing topics:
Cash Rent Outlook – Key Issues and Survey Data
Negotiating Capital Improvements on Leased Farmland
Dealing with Conservation Practices in a Farmland Lease
Executing and Recording Farm Leases
Legal updates and new Farmland Leasing Resources
Our speakers for the webinar include:
Barry Ward, Leader, OSU Production Business Management
Peggy Hall, Attorney, OSU Agricultural & Resource Law Program
Robert Moore, Attorney, OSU Agricultural & Resource Law Program
There is no cost to attend the Ohio Farmland Leasing Update, but registration is necessary unless you’re already registered for our Farm Office Live webinars. To register, visit go.osu.edu/register4fol.
Ohio Agricultural Law Blog 