As the owner/operator of a family farm, planning for the inevitable is essential. One of the most important steps is planning how to optimize the value of the farm business for your heirs, including minimizing the impact of estate taxes.
Tax law is incredibly complex and ever-changing, so it is important to work with an advisor who stays up-to-date on the specifics of how it works in both your state and at the federal level to build your family farm’s estate plan. If your plan is not complete or hasn’t been revisited in a while, it’s time to sit down with them to discuss estate tax and any potential exemptions for a family farm. When working with your tax advisor, you’ll want to explore what types of exemptions apply to your current specific situation.
Estate vs. inheritance taxes
Just to clarify, estate taxes are those levied against your family farm business assets upon your death. Inheritance taxes would be charged to those who inherit your family farm. Depending on where you are located, it is possible that both the estate and your heirs could owe taxes. A handful of states impose inheritance taxes. Typically, heirs are not responsible for paying capital gains taxes on the initial or stepped up value of the inherited property, but those laws may change. In addition to discussing various approaches with your advisor to minimize the farm’s estate tax liability, consider the implications and weigh the options for your heirs.
Factors that impact taxes and exemptions
The good news is that not all family farms will incur an estate tax. Estates worth at or below the current exemption level for federal taxes (or less than 1% of family farm estates) may still need to file but may not be responsible for paying taxes on the estate. To assess your options, meet with your advisor and be prepared to review and discuss:
- The most recent valuation of your family farm and assets will be needed. There is a provision that helps family farms remain as farmland and allows you to use the value of your farm based on the farm use vs. market value of the land. This can be especially useful in those areas where development has driven up the potential for building out for other uses, such as industrial, commercial, or residential.
- Agreement and structure for your business. The structure of your business entity, whether a sole proprietorship, general partnership, or LLC, can impact your estate tax liability. Be sure to share any contracts or agreements with your advisor. The number of partners and who owns what share is essential for evaluating liability and/or potential exemption potential.
- Your succession plan. Are you planning to retire? Are you planning to relocate at that time? What is your plan for your business? The answers to these questions will help define whether this continues to be a family-owned and operated farm – and the eligibility for being considered for certain estate tax breaks when you pass. Having an overall succession plan that takes into account scheduled and spontaneous changes can make the transition more successful.
