Study confirms devastating impact on Inheritance Tax Code changes on family farms

MFB
Study of U.S. Senate legislation calling for changes to the Capital Gains and Estate Tax would take a heavy toll on family farms.

A newly released Texas A&M’s Agricultural and Food Policy Center (AFPC) study of U.S. Senate legislation calling for changes to the Capital Gains and Estate Tax would take a heavy toll on family farms.

AFPC maintains a database of 94 representative farms in 30 states. That data, in conjunction with a farm-level policy simulation model, allowed AFPC to analyze policy changes on farms across the country.

The analysis considered the impact of the Sensible Taxation and Equity Promotion Act (STEP Act) to eliminate stepped-up basis upon death of the farm owner.

The study also looked at the impact of the “For the 99.5 Percent Act (99.5% Act)” introduced by Sen. Bernie Sanders (I-VT) — calling for a decrease of the estate tax exemption from $7 million to $3.5 million, among other things.

The results? Devastating would be an under-statement.

Under current law, when the owner of a farm dies, the estate is subjected to federal estate taxes. As of 2021, $11.7 million per individual and $23.4 million per couple in assets are exempted from the estate tax, effectively protecting most farms from the estate tax.

In addition, when a decedent passes farm assets to an heir, the heir can take fair market values as their basis in the property (i.e., stepped-up basis), effectively avoiding capital gains taxes.

Only 2 of the 94 representative farms in the AFPC databased would be impacted by an event triggering a generational transfer under the current law.

“By contrast, under the STEP Act, 92 of the 94 representative farms would be impacted, with additional tax liabilities incurred averaging $726,104 per farm,” the study reported. “Under the 99.5% Act, 41 of the 92 representative farms would be impacted, with additional tax liabilities incurred averaging $2.17 million per farm.”

According to the study, if both the STEP Act and the 99.5% Act were simultaneously implemented, 92 of the 94 representative farms would be impacted, with additional tax liabilities incurred averaging $1.43 million per farm across the 92 representative farms.

"Farmers across Michigan are already facing uncertainty – from weather, to markets and the lack of labor," said John Kran, Michigan Farm Bureau national legislative counsel. 

"We urge congress to refrain from making changes to capital gains and step up in basis that will negatively impact farmers and other business owners in the rural community. This study from Texas A&M is just another example of how proposals in Washington would hurt farms of all sizes if implemented."