By Jennifer Whitlock
Field Editor

A recent webinar hosted by Farm Journal featuring The Farm CPA Today’s Paul Neiffer offered practical insights to tax situations for farmers and ranchers.

Neiffer, an agribusiness certified public accountant (CPA) and business adviser, specializes in income tax, accounting services and farm succession planning for farmers and ranchers.

Many farm families have delayed tax and succession planning due to uncertainty surrounding the Build Back Better (BBB) legislative proposal, which is opposed by many in agriculture. However, Neiffer said it’s best to move forward and make any adjustments later.

In creating a tax planning strategy for 2022, he advised farm and ranch families to consider the following.

Income tax planning
Income taxes for 2022 appear likely to remain the same, with the top federal tax rate for high-income earners capped at 37%. Income tax brackets changed slightly to adjust for inflation, but no major changes have been made by Congress.

To ease confusion and ensure CPAs can prepare taxes as efficiently as possible, Neiffer reminded farmers and ranchers to keep all receipts and records in one easily accessible place and to continually add to those records throughout the year.

“When visiting your CPA to prepare for filling taxes, bring all your records and files,” Neiffer said. “Have those things organized before you visit.”

Estate and gift tax planning
Things are trickier when considering estate and succession planning, thanks to the uncertainty of the future of the BBB legislation.

Many tax code changes could occur if the legislation were passed as written in the U.S. House version of the bill.

Even if BBB doesn’t pass, without further action, many of the tax cut provisions enacted in the Tax Cuts and Jobs Act of 2017 will expire in 2025, eliminating some favorable tax situations for farmers, ranchers and other small business owners.

“Things may change in 2026, so now is a good time to talk with your estate planner so you’re not caught by surprise,” he said.

The estate tax exemption has never gone down in the past 50 years, according to Neiffer, but he cautioned that doesn’t mean it never will.

And with land values skyrocketing in recent years, families should start preparing now in case that situation does occur. Higher land values could drastically limit an individual’s ability to use the estate and gift tax exemption to transfer land and other farm or ranch assets to their relatives.

“Large increases in land values are happening nationwide,” he said. “If the family never plans to sell the land, this is a time where we should really be looking at larger gifts. Appreciation in farmland values doesn’t matter until you sell it, but from an estate or succession plan, it can matter greatly.”

For 2022, the Internal Revenue Service (IRS) has set the annual gift tax exclusion at $16,000. The lifetime gift and estate tax exemption this year is $12.06 million per individual.

Under current tax law, the lifetime estate and gift tax exemption is set to be halved at the beginning of 2026. Neiffer again reminded farmers it’s better to begin enacting estate plans now in case that changes with any new legislation.

He added that farm families should further consider how increasing land values may disrupt their plans to distribute assets among children equally.

“A lot of farming couples want to transfer their operations to kids and use the farmland to equalize the estate,” he said. “But the reality is, land prices have appreciated from 20-40% in the past year in many places, and that can really mess up your plan if you were going to turn the business over to one child and portions of the land over to others. So, review your documents routinely and update your documents accordingly.”

Tools for succession planning
Each family will have a unique situation, so the tools listed below may not be applicable for every family farm or ranch. Neiffer advises farmers and ranchers to visit with their CPA to see if any of these trust types are a good option for their operation.

Spousal Lifetime Access Trust (SLAT)
A SLAT is a gift from one spouse, called the donor spouse, to an irrevocable trust for the other spouse, called the beneficiary spouse.

The gift of the assets to a spouse removes the assets from the donor spouse estate without a step-up in basis on assets transferred into the trust. The beneficiary spouse has access to both income and principal and can share the distributions with the donor spouse.

Neiffer said it can be more difficult to structure SLATs in community property states, like Texas.

Intentionally Defective Grantor Trust (IDGT)
An IDGT is an irrevocable grantor trust with a purposeful flaw so that the individual continues to pay income taxes during his or her lifetime.

If an individual’s taxable estate exceeds the current lifetime estate exemption amount, an IDGT can reduce the estate since the payment of income taxes on the income of the IDGT is not considered a gift.

Grantor Retained Annuity Trust (GRAT)
A GRAT is an irrevocable gifting trust that can help farmers and ranchers minimize taxes on large financial gifts to family members.

The GRAT is established for a specific number of years, during which the grantor contributes assets in trust but retains the right to receive the original value of the assets and earn a rate of return specified by the IRS. When the term expires, the remaining assets are given to the grantor’s beneficiaries.

Neiffer reminded those watching the webinar that the best estate and succession plan is one created with their financial advisor to fit their unique circumstances.

While it’s not necessary from an economic standpoint to create a succession plan, he said it can help decrease animosity or angst among family members who work together in a business capacity.

“There isn’t necessarily an economic reason to have a succession plan. It’s more of a family issue,” he said. “Typically, farm families that experience turmoil upon transfer is because they don’t have a set plan or don’t communicate the plan effectively.”

Click here to view the webinar featuring Neiffer’s comments.