Wednesday, April 28, 2021
Summer Conferences – NASBA Certification! (and Some Really Big Estate Planning Issues - Including Basis)
This summer Washburn Law School is sponsoring along with other co-sponsor two conferences on farm income tax and farm/ranch estate and business planning. The conferences, while primarily directed to practitioners that advise farmers and ranchers, is also for agricultural producers and others interested in learning about tax and estate/business planning issues. Now, Washburn Law School has been certified by the National Association of State Boards of Accountancy (NASBA) as a provider of continuing professional education (CPE). That means that CPAs and accountants can receive CPE credit for attending online or in person.
Summer conferences – the topic of today’s post.
Ohio and Montana
The first summer conference is on June 7-8 at the Shawnee State Park Lodge and Conference Center near West Portsmouth, Ohio. The second summer conference is slated for August 2-3 at the Hilton Garden Inn located in Missoula, MT.
For more information, here is the link to the Ohio seminar: https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html.
The co-sponsors for the Ohio event are as follows:
The Wright and Moore Law Company of Delaware, OH; AgriLegacy; and BASE.
You may learn more about each one here:
For more information about the Montana seminar, click on the following link: https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html.
In addition to the sponsors of the Ohio seminar, an addition sponsor is the Budd-Falen Law Firm in Cheyenne, Wyoming. More information about the firm can be found here: https://buddfalen.com/.
Critical Issues for 2021 (and Potentially Beyond)
The political power advantage in Washington, D.C. is razor thin but proposed legislation, if it were to become law would make significant impacts on tax and estate planning for many farmers and ranchers. The mindset of the current administration is generally opposed to people that work for themselves – such people can’t be as easily controlled. That means that many in agriculture are in the crosshairs of policy.
So what will we be talking about at the summer conferences? A major emphasis will be on how to plan for proposed changes in the law, and how the changes will impact farming and ranching operations.
Here’s just a few of the things we will address:
- The current proposal to tax any transfer of property (after an exclusion amount) either during lifetime or at death that has a net gain associated with the transfer. What are the implications of this for certain types of trusts?
- The proposal to require all non-grantor trusts to report gain on appreciated assets contained in the trust every 21 years, and provide to the IRS a balance sheet, income statement and a list of the trustees, grantors and beneficiaries.
- The impact of proposed legislation on installment payment of federal estate tax and special use valuation.
- Potential changes in the level of the present interest annual exclusion and the establishment of a lifetime ceiling on gifts.
- The proposed reduction in the federal estate tax applicable exclusion to an amount significantly less than the current $11.7 million amount, and an increase in the tax rate applicable to taxable estates.
- The proposed change to the current “coupling” of the federal estate and gift tax systems.
- The proposed elimination of “Dynasty Trusts” and “Intentionally Defective Grantor Trusts.”
- The proposed changes to Grantor-Retained Annuity Trusts that would basically eliminate them as a planning concept.
- The proposed elimination of valuation discounting as planning strategy.
- The proposed increase in the capital gains tax rate
- The proposed increase in the corporate tax rate
What About the Estate Tax and Income Tax Basis?
While it now looks as if the federal estate tax exemption will not be reduced, as I wrote here, https://lawprofessors.typepad.com/agriculturallaw/2021/02/what-now-part-two.html, the really big issue is income tax basis. Currently, an asset that is included in a decedent’s estate at death for tax purposes receives an income tax basis in the hands of the heir(s) equal to the fair market value of the asset at the time of death. I.R.C. §1014. This is commonly referred to as “stepped-up” basis. Thus, if the heir were to sell the asset capital gains tax for the heir would be computed as the difference between the selling price of the asset and the value at the time of the heir inherited the asset. For an asset that is sold shortly after inheritance, the capital gains tax is likely to be minimal to none.
If the stepped-up basis rule were to be eliminated, the heir would receive the decedent’s income tax basis. For farmland that the decedent owned for many years, for example, that basis could be much lower than the date-of-death value. That would be particularly the case if the decedent had received the farmland by gift, receiving the donor’s income tax basis in the farmland at the time of the gift. The result would be heir’s being hit with large capital gains tax, or simply refusing to sell the land (if possible) and creating a “lock-in” effect with respect to certain assets.
What would be particularly troubling is if the income tax basis rule were changed such that the appreciation in a property’s value would be taxed at the decedent’s death rather than waiting for the heir to sell the property.
A change in the income tax basis rule would substantially impact estate and business planning. This is particularly true with respect to farm and ranch estates where many assets have a low basis – either from being owned for many years or because of income tax planning strategies that have substantially diminished or eliminated the basis in assets. Changing to a “carry-over” basis rule at death would also be an absolute nightmare for tax professionals. That was certainly the case the last time a carry-over basis rule was tried during the Carter administration. The protests from the practitioner community (and others) were so substantial that the Congress repealed the rule before it took effect.
This basis issue will be a significant topic of discussion at the summer seminars. What planning steps can be taken to plan to avoid this proposed rule change? The answer to that question depends on whether the change in the rule will be retroactively effective. If retroactive, then that will foreclose many (if not all) planning options that could be utilized now.
To be legal, a retroactive tax law change can satisfy the constitutional due process requirement if it is rationally related to a legitimate purpose of government. Given the enormous amount of spending that the Congress engaged in during 2020 to deal with the economic chaos, a "legitimate purpose" could be couched in terms of the “need” to raise revenue. See, e.g., Pension Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717 (1984); United States v. Carlton, 512 U.S. 26 (1994); In re Fifield, No. 04-10867, 2005 Bankr. LEXIS 1210 (Bankr. D. Vt. Jun. 20, 2005). That’s even though historic data indicate that government revenues don’t necessarily increase in the long-term from tax increases.
This is definitely the summer to attend one of these events. The planning issues loom large. The economic impacts of the proposed changes can be substantial and ripple throughout the entire economy. In addition to income tax, these critically important estate planning issues will be unraveled and open for discussion at the summer seminars. I encourage anyone interested in agriculture, sustainability and transition of the family farm and food production to attend – either online or in-person. These will be vitally important conferences. NASBA certification will allow those needing CPE to attend online and receive credit. That’s a big plus!