About This Episode
Paul Neiffer's first correction is that no proposal on the table eliminates the step-up in basis. What is proposed is a transfer tax: you would still get the step-up, but owe an immediate tax. For family farms, the talk was that continuing to farm the ground might defer it, though whether you get the step-up only when you actually pay the tax was still undefined, as was the definition of a family farm itself.
That definition matters most for siblings. If several children inherit and only one farms, Neiffer's read is that the farming heir avoids the transfer tax while every non-farming sibling owes it. He also expects a possible either-or: pay the transfer tax and take the step-up, or skip both. He would skip both. Senator Grassley had written a Wall Street Journal op-ed and called the transfer tax dead on arrival, which Neiffer thinks overstates Grassley's leverage.
On the rest of the package, he sees a 1031 clampdown going nowhere, since it raises perhaps $10 to $15 billion over ten years against a $3.5 trillion bill, and a married couple would still get roughly $1 million a year. He is more worried about proposals to cut the lifetime exclusion to $3.5 million and decouple the gift exclusion at $1 million with a $30,000 annual cap. His advice is to be ready to gift, not to gift in a panic.
“I see way too many farms that should have been transferred, you know, when mom and dad were in their 70s. And, you know, they wait until mom and dad pass away and it's 90, 95, 100 years old, and it's just not very efficient.”
— Paul Neiffer
Key Takeaways
No proposal eliminates the step-up in basis. The proposal is a transfer tax that would trigger an immediate tax bill at the transfer.
If only one heir farms, Neiffer expects the farming heir to defer while non-farming siblings owe the transfer tax, though the definition of a family farm was unsettled.
Given the choice between paying the transfer tax for a step-up or skipping both, Neiffer would skip both, because a step-up buys you nothing on land you are not selling and cannot depreciate.
The 1031 exchange clampdown looked unlikely: about $10 to $15 billion over ten years against $3.5 trillion, with roughly $1 million a year still allowed for a married couple.
The gift proposals worried him more: lifetime exclusion cut to $3.5 million, gift exclusion decoupled and dropped to $1 million, and LLC or trust transfers capped at $30,000 per year per person.
Keep making gifts that already fit the succession plan, but avoid extraordinary tax-driven gifts. Farmers who did that in 2011 and 2012 are paying for it now.
Full Transcript
Narrator: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now here is your host, Chris Barron.
Chris
Barron: Welcome everybody to another episode of the Ag View Pitch, and we wanted to get back with you again because I have Paul Niefer here with me, the, uh, expert tax farm tax person. And so Paul, how's it going today? Good.
Paul
Neiffer: I'm almost more of a farmer now than I am a CPA.
Chris
Barron: Yes, actually today I've got Paul in my office with me sitting across the table and, and you know, we've been out this summer talking to a lot of producers and one of the things that gets brought up as we work through all of the succession and transition planning and all those things obviously is taxes.
Narrator: Yep.
Chris
Barron: Okay, and so what I wanted to do is just, you know, with some of the questions we're getting is just get a little bit of clarification with you. And I know you don't have all the answers today, but there's some things we can talk about that I think are important to people. And so what I want to do is start out with the elimination of the stepped-up basis, have you kind of walk through that, explain what that means, what you're hearing, what's going on with Congress, all those kind of things.
Paul
Neiffer: And we'll— well, and I think first the misnomer is they're not eliminating step-up in basis. At least there's no proposal to eliminate step-up in basis. What they're actually wanting to propose is a transfer tax. So you still would get the step-up in basis, but you'd have to pay an immediate tax. Now what they're talking about for family farms is maybe as long as you continue to farm the farm, you're not going to owe the tax. Well, that— does that mean you still get the step-up, or do you only get the step-up when you actually pay the tax? You know, that to be determined. And then what's the definition of a family farm? You know, a lot of family our definition is that so like you and your brothers and sisters inherit property, they're all related to you, but you're the only one farming.
Well, under— we think under the proposal, only you wouldn't owe the transfer tax, but all your siblings would owe it because they're not involved in farming. So there's a lot of those details that are still to be determined. We know that Senator Grassley had written an op-ed to the Wall Street Journal a couple weeks ago And then he came out, I think, earlier this week and sort of indicated that the transfer tax— I'm going to call the transfer tax— is sort of dead on arrival. I wouldn't go that far. I mean, it's, it's, uh, Senator Grassley can say that, but he doesn't have any control right now. I mean, it's, it's all in the hands of— I'm going to call it the progressive side of, of the party. So, so we'll see. I think what may happen is they'll say Well, if you don't want to pay the transfer tax, we're not going to allow you to have step-up in basis. I know that's one or the other.
That's one of the— so you either get to pick if you want to pay the transfer tax as a family farm that's continuing to farm. If you want to pay the transfer tax, you can and you get step-up, or you don't pay the transfer tax and you don't get the step-up. Now, certainly, if that's an option, I'm always going to take it. I'm not going to take the step-up because I don't want to pay a tax right now. So, you know, we'll see.
Chris
Barron: So if— draw this analogy, you know, a lot of times we see operations where, just like you said, you've got siblings that, you know, mom and dad, all of a sudden they're gone out of the picture. Um, you know, how does that work for the actively engaged? I mean, explain that again, you know. So the, the— basically, the— if they want to sell, if the, the siblings that are not actively engaged in the farm, they want to sell, they're, they're going to get to pay a tax.
Paul
Neiffer: Right, right. And I think if we think about it from an economic standpoint, yeah, yes, we don't want to pay tax, but so much of assets that really should have been transferred during lifetime, people aren't transferring it. They're waiting for the person to pass away. And it's a very— Stepped up, basically. Right. And it's a very inefficient process. I mean, mom and dad, hey, we want the operation to go to the kids. We want them to own it. Well, the tax is so high that they just don't want to do it. Well, if they know the tax is going to be there, whether they do it at death or during lifetime, maybe a lot of these things would be transferred. And, and if we know the rules, we can certainly mitigate that tax. I mean, we're still going to have some, but we could probably reduce it fairly efficiently.
But yeah, I see way too many farms that should have been transferred, you know, when mom and dad were in their 70s. And, you know, they wait until mom and dad pass away and it's 90, 95, 100 years old, and it's just not very efficient.
Chris
Barron: Yeah, it's not efficient, but it's, it's worked on the— from a tax standpoint to hold the land. I mean, we do— we, we're currently still you know, working through that process with a lot of our clients. You know, you— mom and dad hold on land, they rent the land, that's their retirement, you know, for the— for mom and dad.
Paul
Neiffer: And I think that's great. And remember, if, if you're going to hold the land, that next generation is going to hold the land, step-up doesn't gain you anything. You can't depreciate land. It only gets you something if you sell the land, right? And if you're going to sell the land, well, maybe you should pay the tax anyway, you know.
Chris
Barron: That's right.
Paul
Neiffer: And we've heard, um, we've had multiple conversations with like the Farm Bureau, National Cattlemen's Beef Association, some others that, you know, we had heard maybe a couple weeks ago that this was dying down. Well, now we're starting to hear maybe that, um, what the progressives think, if, if a family member gets land, they think you're a land baron even though you're only getting a few hundred acres. They think that's a land baron because they see the idea Well, we just saw what land in Grundy County, $22,600, 100 acres, that's, that's $2.2 million. So to a progressive, that's a lot of money, right? And so that's, that's the issue right now that we have to deal with, is that the progressives really don't have a lot of sympathy for farmers.
Matter of fact, I think they view most farmers as, as they lump them in with that corporate farmer, you know, think they think anybody in production ag is by default a little bit evil, and, and we know that's wrong, but that's the perception. A lot of times that's the reality.
Chris
Barron: Um, I was thinking of a question too when you were talking about that, and see if I can remember phrases correctly. But, you know, if they— if the siblings, you know, if, if the one sells, basically, what if they— or let me back up. Let's say if the, if the the operating sibling sells and they want to, you know, turn around and put their money back in another parcel or the same parcel or whatever, but that has to be sold because of financial reasons or whatever, then do you think that would be able to be 1031 for the farmer, for the, for the actively engaged participant?
Paul
Neiffer: Yeah, we know that President Biden has talked about, you know, clamping down on 1031 exchanges. That, that doesn't appear to be going anywhere. And, and if you're a married couple, easily $1 million is still going to be allowed each year. So I think if it's less than $1 million, they don't have to worry about it. Even if it's over that, I think right now it's, it's pretty clear that that provision is not going to go through. And the amount of money that's raised by that provision over a 10-year, which is how they scored, is not a large number. I think it's $10 or $15 billion, which in the scheme of $3.5 trillion is not a large number.
Chris
Barron: What about, um, the other area I just wanted to ask you on quick here, and then we'll wrap it up, but is on the inheritance tax side of things in terms of levels of anything there.
Paul
Neiffer: You know, again, President Biden didn't have anything in his Green Book. We keep hearing the progressives would like to drop the lifetime exclusion down to $3.5 million, but the more important thing that I think is worse is they want to drop the gift They want to decouple the gift exclusion from the lifetime estate exclusion, and they want to drop that all the way down to $1 million. And then what's even worse is if you want to transfer— let's say you got an LLC interest in farmland, or you got something you want to put into trust— they're going to limit that to $30,000 per year per person, not, not the going to each people. But if I wanted to give away those type of gifts, I could only do $30,000 a year. Before it eats into that million-dollar exclusion. So if that goes through, that dramatically changes the process that we would be looking at doing gifts.
Now we got to remember, this is only a temporary, it's not going to be permanent. We haven't anything permanent in taxes. You know, I've been doing this almost 40 years and nothing's permanent. Now, right, they sometimes last a while, but you know, if you're relatively young, even if all these provisions go through, believe me, they're going to get changed. And one thing to realize, business is in control. You know, a lot of times people think that Congress is in control or the president's in control, but throughout history with taxes, business always ends up being in control. So if Congress goes too far, business is going to rein them back. You know, that's, that's always been the history. So I think that'll continue here.
Chris
Barron: Okay, any, anything else on the horizon that producers, farmers that are listening to this podcast that they should be aware of, or anything that we should be doing between now and then? Or do we just sit on our hands and let this— let things kind of transpire, and then we bring you back again and say, okay, what's, what's real, what's truly going on here? What's the final word?
Paul
Neiffer: Yeah, I think if you have a decent amount of net worth, uh, that you should be looking at being ready to make some gifts, not don't make gifts now. I mean, we have— there's lots of attorneys, lots of CPAs out there advising their clients, you got to make a gift now, you got to make a gift now. And I, I'm not at that stage, but I want you to be prepared.
Chris
Barron: But, but if, if there's a reason for doing that, so like just for example, we've got a number of clients that are gifting over rolling stock and yeah, and it's part of the plan. Yeah, you know, that's different than doing it because we're trying to get out of paying taxes, right?
Paul
Neiffer: Right. If you have a series of gifts that make sense from both a succession business business. Yeah, keep doing that. I'm, I'm talking that extraordinary gift. We had way too many farmers back in 2011, 2012 that ended up doing major gifts, and now they're paying for it. Either they didn't have the income they needed, they thought their kids were going to take care of them, then find out, you know, the kids really, once they started getting some money, well, mom and dad really don't need that much. Yeah. So that, that's my concern. You always want to make sure you're taken care of.
Chris
Barron: Yeah.
Paul
Neiffer: And then worry about the taxes later.
Chris
Barron: Yeah, mom and dad, protect yourself, and then you can transfer things down the road too.
Paul
Neiffer: Exactly, exactly.
Chris
Barron: All right, anything else I didn't ask? We'll wrap it up.
Paul
Neiffer: Nope, I think we're good.
Chris
Barron: Awesome, sounds good. Well, hopefully that was a good update for everybody, and we'll have Paul back again here as some of this information becomes more crystal clear at some point in time. Probably a Christmas present, I think, is what—
Paul
Neiffer: I hope not. I hope— I'm worried it might be a Halloween, you know, trick-or-treat. So it'll be more of a trick. Yeah, it would Yeah, it won't be a treat, we know that.
Chris
Barron: Yeah. All right, well, thanks a lot, Paul. Really appreciate it. No problem. All right, thanks everybody for listening again, and we will catch you next time on the Ag View Pitch.