How to Prepare for a Possible Increase in Estate Taxes

Next year could be the last for generous exclusions from estate taxes. The Tax Cuts and Jobs Act of 2017, which deals with estate taxes, runs through the end of 2025. 

If Congress doesn’t extend the law, exclusions or exemptions revert to the 2017 level. Indexed for inflation, that’s about $7 million, roughly half this year’s exclusion of $13.61 million per individual, or a combined $27.22 million for a married couple. 

Last year, national agricultural tax authority Kristine Tidgren of Iowa State University (ISU) alerted farmers and their advisers to this potential risk.

“If they have assets of $7 million and above, they really need to start talking with a trusted tax adviser to start making plans but not pull the trigger,” she said at the ISU farm tax forum last September.

That’s still good advice. Putting off planning isn’t wise. Let’s look at why you need to plan, and a few approaches to consider with your tax adviser. 

How big is your operation? 

First, is your estate small enough to be caught by a tighter $7 million net?

Farmland may be peaking in high-value states such as Iowa and Illinois. But in Iowa, for example, the average price of best-quality farm ground remains almost $15,000 per acre. It takes about 465 of those to hit $7 million (double that for a married couple). Neighboring Nebraska, where rangeland lowers the statewide average, saw a 5% increase to just over $4,000 an acre by this year. At that value, anything above 1,750 acres triggers an estate tax. 

Of course, farms and ranches aren’t bare ground. Buildings, machinery, livestock, investments, and savings add to your estate’s value.

Second, Tidgren advises following this issue closely. That’s more excellent guidance, though estate tax politics remains a huge X factor in November’s election. Presidential candidate Donald Trump has told donors he will support extending the tax cut law. President Joe Biden, in his proposed 2024 budget, laid out many tax law changes that effectively raise estate taxes. But Congress will write any tax laws. The outlook there is murky, with the Senate tilting toward Republican control and the House possibly reverting to a slim Democratic majority.

Few things happen quickly in Congress. When asked how long it might take to extend the 2017 estate tax limits, Sen. Chuck Grassley (R.-Iowa) recently told me, “It had better be done by December of next year” [when the tax law expires]. Grassley, a former chairman of the Senate Finance Committee, believes “death shouldn’t be a taxable event,” but concedes totally eliminating the estate tax isn’t likely.

If the GOP gains control of Congress and the White House, Grassley says he expects fairly fast work on a law to continue the current estate tax exclusions, indexed to keep rising with inflation. If his party doesn’t have complete control, he doubts Democrats would just let the law expire. Divided government, he adds, might lead to a compromise tax bill, as happened in 2011.

David Malson, an attorney based in Grand Rapids, Michigan, who does estate planning for farmers and agribusiness owners, says stalemate is most likely. The odds of either party controlling Washington are “slim to none,” he says, adding, “I think we’ll end up with gridlock and with an inflation-adjusted exemption between $6 million and $7 million per spouse.” 

He says it’s important to use the higher exclusion before it expires. The exclusion includes what you gift to heirs before death, minus $18,000 a year per heir that is tax free.

Malson uses trusts and other legal entities to move part of a farm’s assets off the balance sheet to second or third generations. The farm owner can keep control by retaining voting shares in the business. At the owner’s retirement or death, those shares typically are gifted or sold over to next-generation family members.

What’s the first step? 

This complex planning can involve six to eight months of meetings, with all the affected family members, family attorneys, tax advisers, accountants, life insurance agents, and others.

“Build your mousetrap first,” Malson suggests. “Have the trusts designed, drafted, and signed.” He recommends having it built no later than the end of this year and implemented by the middle of next year.

Malson, who is part of the nationwide Barnes & Thornburg law firm, says one reason for seeing to this now is there are limited qualified professionals available for complex estate planning. Assets also have to be appraised: another potential delay.

The exact approach to all this can be complex and varies by business. But here are a couple of widely used trusts Malson has helped structure:

• An intentionally defective grantor trust (IDGT). Sometimes called a dynasty trust, it gifts or sometimes sells assets from one generation to the next, ideally at a discounted valuation. The goal is to maximize transferred wealth while removing assets from the taxable estate. However, the grantor pays tax on revenue those assets generate, one reason it’s called “defective.”
• An irrevocable life insurance trust. If the trust owns a life insurance policy, the proceeds aren’t included in the insured’s estate at the time of death
• Finally, a few caveats: Nothing here amounts to legal advice; get that from your attorney with expertise in estate planning. Beware of scammers who misuse trusts. Your family lawyer, a bank trust department, or land-grant university experts can help you find a reputable estate tax planner.

Learn more

Chapter 6 of Iowa State Extension’s estate and succession planning workbook contains a more detailed introduction to trusts. The entire workbook is here: calt.iastate.edu/estate-and-transitions-topics.