Democrats want to
increase inheritance tax and Republicans want to abolish it. This tax is anti-family, anti-small business
and anti-food supply. Big Global Ag is with the Democrats. Our food supply and our economy hang in the balance.
Proposed IRS rule might
affect transition plans By Brent Haden 9/19/16
The risk of increased tax burdens for many family
ranch operations is very real. From the September
2016 issue of Drovers.
In the past 50
years, family ranch operations have increasingly incorporated under state law
to take advantage of the liability protection and other business advantages
available to corporate entities. Limited liability companies (“LLCs”), family
limited partnerships (“FLPs”) and other corporate entities also provide tax
advantages when transitioning ownership of the operation to the next
generation.
IRS rules allow
each individual to transfer $5.45 million worth of assets during their lifetime
or at death without paying a gift or estate tax. In addition, a person can give
$14,000 per year to any individual without cutting into that lifetime
exemption.
For example, if
a rancher gives his child property valued at $1 million, the rancher would take
a hit of $986,000 against his lifetime exemption. When the rancher dies, the
government would then apply an estate tax against all of the rancher’s assets
valued at more than $4.46 million because he has already used $986,000 of
lifetime exemption.
Under current
IRS rules, corporate entities can be used to transfer a family ranch entity at
a discounted value. For example, these rules allow for a discount due to lack
of marketability for an interest in the company. Unlike purchasing public
stock, you won’t have buyers lined up outside the door if you try to sell your
25% interest in a family ranch entity. The IRS recognizes this limited number
of buyers by allowing owners to discount the value of the asset when it is
owned in a corporate entity. The discount allowed usually runs somewhere
between 10% and 35%.
Similarly,
current IRS rules allow a discount when a rancher gifts a minority ownership
stake to another family member. This is because gifting a 5% interest in your
ranch to your son does not allow your son to control the operation. The IRS
again recognizes this reality by allowing a discount. The current
rules have been a powerful tool for estate planners. They help smooth the
transition of agricultural operations between generations by creating lower
estate tax liabilities while allowing the operation to remain intact.
But these
discounts are now under threat, as the IRS has proposed rules that would
eliminate the discounts for lack of marketability and for lack of control. The
current regulations are merely proposed, and the IRS has asked for public
comment through Nov. 2, 2016. After public comment the IRS could make changes
to the proposed rule, but has indicated this issue is a priority, leading many
to project that the new rules could be finalized by early 2017. The risk of
increased tax burdens for many family ranch operations is very real.
For this
reason, if you are considering transferring a share of your family ranch entity
in the foreseeable future, the proposed IRS regulations are a good reason to
seriously consider moving your time-table forward. As always, you should
consult with your accountant and a business or estate planning attorney to
determine whether and when a transfer of your assets is appropriate for your
ranch.
Brent Haden was raised on a Missouri farm and graduated from the
University of Missouri and from Harvard Law School in 2002. He lives in rural
Callaway County, Mo., with his wife Connie and his two sons. You can contact
him at brent@haydenlaw.com.
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