Tax Tip of the Week | Should You Gift Land (or Anything Else) in 2019?

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes - nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     -    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state's rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark C. Bradstreet, CPA

–until next week.