New tax proposals target generational wealth
The federal government wants to slow or eliminate generational wealth through a series of proposed new taxes and reduced exemptions. This was the message Michael Fraleigh, an East Lansing-based lawyer specializing in business and succession planning, had for a group attending an educational session on August 18 at AgroExpo in St. Johns, Michigan.
The Biden administration, under the American Jobs Plan and the American Families Plan, as well as Senator Bernie Sanders, I-Vt., Senator Elizabeth Warren, D-Mass., And others have several tax proposals that could greatly affect farm operations.
“There are proposals to increase tax rates on income, capital gains and change the rules around gifts,” said Fraleigh of the law firm Fraleigh. “But if I had to choose – the most important thing or the scariest part of the proposals – it would be the transfer tax they want to impose, ”he added, noting that there is no current transfer tax.
The proposed transfer tax would be determined on the appreciated assets. “So even if you don’t have inheritance rights, [current $11.7 million lifetime exemption] Uncle Sam wants to tax the transfer of ownership out of your trust, out of your estate by will or gift, while you are alive at 39.6% of the value acquired in the assets. This is in addition to any inheritance tax, ”Fraleigh said.
The provisions discussed also state that if the assets are left in a trust and not distributed, there could be a tax deemed transfer every 21 years – 50 years are also under discussion.
“So there will be no way to leave it in the trust and not distribute it to the children to avoid the transfer tax,” he said. “They’ll say if your trust was funded before 2005, they’ll do a deemed transfer tax [treating it as if you had sold it] in 2026 and every 21 years thereafter. What they’re looking at is how much gain was added to that asset during that time, and they want 39.6%.
Limit the transfer of assets
The Biden administration, he says, doesn’t want people to pass assets from one generation to the next. “The problem, as has been reported, is that if your parents pass $ 1 million in assets to you, and over the course of your life you take them to $ 2 million for your kids, every generation gets an unfair advantage. compared to others, ”Fraleigh explained. “I understand the government wants to collect these taxes and then redistribute them through social programs.”
Under consideration, a 15-year window to pay transfer duties (possibly with interest). However, to be eligible, all heirs must be actively involved in the work or management of the farm, Fraleigh said. “It’s in the air what happens when some of the heirs cultivate and others don’t. I don’t know if that disqualifies everyone or just a part.
Another concern is that IRS debt will create a lien on the farm. This means that if you needed this asset as collateral for an operating loan or to purchase another asset, you will need to speak to your lender. a second position with the IRS – the IRS would get paid before the lender, ”Fraleigh said.
Congress tends to lump multiple provisions into one bill, he noted, and some of those measures can take effect immediately if it has enough votes. “This could come into force on January 1, 2022, but there is also talk of making these provisions retroactive. I have heard dates from January 1, 2021 and also in mid-April 2021.
Now is the time to review your financial, estate and estate plans, advised Fraleigh. “If your health is poor or if you are of advanced age, you may want to consider implementing part of your estate plan and the transfer of assets this year before the law comes into force, then that you still have your $ 11.7 million exemption, ”he adds. . “There are proposals to bring that down to $ 3.5 or $ 5.6 million. If you’re going to be hit by this 39.6% transfer tax, that’s a really big financial incentive to do something about it now. “
Conversely, if a farm owner is in relatively good health, there is the possibility of waiting and seeing what will be adopted, or if new leaders are elected who are more sensitive to the potential impact.
Another proposal aims to abolish the increased base. The basis is the value of the property at the time of its purchase. Currently, the law allows the base to be adjusted to fair market value for land inherited at death.
“If I bought a piece of land for $ 500 an acre and when I died it was worth $ 1,000, the new base would be $ 1,000,” Fraleigh said. “You don’t pay taxes on it right now; you would only pay tax if it was sold for more than $ 1,000. “
If the grossed-up base is phased out and the property is sold, capital gains would be due on any amount over $ 500, he adds, noting that some predict its removal won’t have enough backing to pass.
Changes are also proposed on the donation of money. Currently, $ 15,000 per year can be offered to an individual tax free for either party. There is no limit to the number of gifts of $ 15,000. One proposal is to limit donations to a total of $ 20,000 without taxes, and no more than $ 10,000 per person.