What is in this article?:
Before the end of 2012, you and your spouse may transfer farm assets up to $10 million (reduced by any taxable previous gifts) to your children or even grandchildren. Such transfers to the next generation are estate, gift and generation skipping tax-free, relieving the burden of paying significant estate taxes for the next generation of farmers, who may be asset rich but cash poor.
If you decide to take advantage of the two-year window now, tax advisors can help you potentially transfer farm assets valued in excess of $10 million by using various techniques. You and your spouse could gift $10 million in farm assets to an irrevocable trust for the benefit of a child or grandchild and the trust could buy an additional $10 million of farm assets financed by an intra-family loan at today’s low interest rates. If the trust is a grantor trust, the grantor pays the income tax on the income earned on the $20 million trust.
An older concept, which could fit beautifully into some of these options, is the discount for lack of control or marketability. For example, a business entity such as a limited liability company (LLC) could be created to own the farmland or other farm assets. Discounts such as marketability and minority discounts of 20 percent or more are usually appropriate for the interests in the LLC that are transferred, resulting in a higher value of the underlying assets being transferred tax-free.
If a 20 percent discount is applied to an interest transferred by a farmer and spouse worth $12.5 million, then the discount applied is $2.5 million and the gift is deemed only $10 million, which is tax-free.
This structure would also allow you to transfer farm assets while maintaining control of the farm by giving non-voting interests of the LLC to your children or grandchildren, while you retain the voting interests.
A very large amount of life insurance could be purchased with a gift exemption of $5 million or $10 million, if spouses choose to use the split gift election. Structured properly into an irrevocable life insurance trust, the insurance proceeds can pass free of probate, income and estate taxes to younger generations.
The generation skipping tax lifetime exemption law which expires in 2013 is also $5 million, and in conjunction with the gift tax exemption provides a time-limited opportunity to shift wealth to skip persons (such as grandchildren) during your lifetime without paying transfer taxes.
A possible disadvantage of making a gift of farm assets during your lifetime instead of giving the farm assets at your death is there is no step-up in basis for farm assets given during your lifetime.
Assume you originally purchased the farm’s several acres of land for $250,000. The land is currently worth $5 million, and will be worth about $13 million when you die. If the farmland is given to the next generation of farmers now, the recipients will have a basis in the farmland of $250,000 (your basis, the amount you originally paid for the farm). If the farmland is given to the next generation of farmers at your death, the recipients will have a step-up in basis to $13 million (the market value of the farm at your date of death).
The fact that the family member who receives the gift now only gets the basis that you have in the farm assets, and does not get the step-up in basis could be considered a drawback. However, significant appreciation is removed by gifting the farm assets now.