Do you remember all the feared tax proposals from last year? They were all over the headlines. Then “poof”, the scare of the ‘crazy tax’ just went away. Well, not so fast my friends. Enter inflation! It’s become the new ‘crazy tax’ that’s hurting farm succession.
About every other land auction now sets a new record high in the area. The prices from three months ago, let along three years ago, are being blown away. So, how is this crazy inflation taxing your farm?
Let’s start with the easy examples:
Case #1 – The Need for Tools: A farm couple with 1,200 acres plus machinery, grain, and a few investments, used to have a $15M estate. They’ve added nothing new, but now their estate is valued at $24M due to inflation. Don’t fall asleep on this. There are tools that can be put in your toolbox to help with this, but the tools are worthless if they’re left on the shelf at the hardware store.
Case #2 – Hidden Liability: An 1,800-acre farm was already at $25M a few years ago. Now with land worth $5,000/acre more today, they may be looking at a 40% tax on the inflated value. That could amount to over $3 M of tax! This is on the same farm that had no tax issues just a few short years ago.
Ok, so right about now, some of you are ready to tune out and say this only pertains to larger farms. Well, keep reading. There’s plenty of potential “inflation tax” to go around and it does not discriminate by farm size.
Case #3 – Printing Your Land: Now it is everyone’s turn for the inflation fun fest. Are you going to attempt to make this ‘fair’ and ‘equal’ to all your family members? Are you going to expect the farming heir to pay 40% more for the same assets you had just 2 years ago? Could you do that yourself? Unlike the government, farmers can’t just print their money for purchasing higher priced land.
Case #4 – Kick the Can: Your plan has 100% of your land going into an LLC for all your children so the farming heir doesn’t have to buy it out, and the heirs all get the same inheritance. But did that really get rid of the problem? Would you want to own your farm with all of your siblings? In 22 years of doing this, I can tell you the answer will be about 1% Yes, 1% Maybe, and 98% Heck No. The same inflation and fairness question you kicked down the road will come back to kick your children or grandchildren too. It will just be with bigger numbers.
Case #5 – State Liability: This depends on the state you live in and if you have a farming heir. For example: If you live in Minnesota, your 16% tax starts at $3.5M if you don’ have a farming heir, and $5M if you do. That might take less than 300 acres for a widow or a divorced person before their state estate tax problem kicks in.
Case #6 – Compounding Problems: The next generation may already have a problem similar to yours. Perhaps even greater than yours! If the next generation already has their own farm assets that are inflating, and then they inherit more inflated farm assets from the parents, then the problem may compound again only one generation later.
Case #7 – All Product No Plan: Let’s say you were sold life insurance as a ‘get out of jail’ card. However, you had nothing coordinated with your ownership strategies, beneficiary designations, or legal documents. Plus, you never established an equitably land valuation model within your estate plan. Now your assets have inflated, but your life insurance did not. You farm heir may not have enough cash for the land buyout at these values. Plus, there may be an estate tax to pay on top of that.
Case #8 – Inflated Expectations: Many heirs will expect more. They read the headlines too. As their bank accounts decline due to inflationary costs, they see higher land prices coming their way upon inheritance. Perhaps they’ve earmarked it to serve as their own personal bailout plan. Managing inflated family expectations may be as challenging as anything.
Case #9 – Balance Sheet Denial: The conservative numbers on the balance sheet for your lender are probably not keeping up with land inflation. That’s designed to keep you out of financial trouble. However, the current inflated numbers are in fact the ones that will be used on your estate tax return. Be sure to know the difference.
Inflation cuts many ways. It’s the latest ‘crazy tax’ that’s hurting your farm succession plan. The question is, what’s your plan to deal with it?