Proposed Legislation Would Increase Estate Tax Exemption for Farmers/Ranchers

Congressman Jimmy Panetta of California has reintroduced a bill in the U.S. House of Representatives with the aim of increasing the 2032A special-use valuation cap for qualified family farms.

The intent of the increase is to reduce the number of family farms having to sell farm-related assets to satisfy an estate tax debt.

If passed, the higher exemption will have a significant positive impact for farm families in taxable estate brackets.

2032A is a helpful tax valuation for farm families that reduces the value of some farm real property. Rather than having to value farm real property at market or development value, 2032A allows qualified family farms and ranches to elect a lower value based on a few specified formulas.

The reduction in value is capped at $1.31 million for 2023. The proposed legislation would increase the baseline exemption from $750,000 to $13 million.

Panetta previously proposed this same legislation in the last Congress, but it died in the U.S. House Ways and Means Committee. A companion bill in the U.S. Senate met the same fate. The destiny of the new bill remains to be determined.

What it means for farmers/ranchers:

First, not every farm family will qualify for 2032A. The exemption is relatively narrow. Among other conditions, the person who passed away must have been a current or retired farmer, the land must be used by a family member for farming after the person passes away, and it must pass to a qualified or eligible heir. 

Second, not every farm family is at risk of paying estate taxes, sometimes referred to as an inheritance tax or death tax. The federal estate tax exemption for 2023 is $12.92 million per person (or $25.84 million per couple). If you die and the estate does not meet or exceed the exemption level, then the estate owes no estate taxes. If you die and the estate value exceeds the exemption level, then the estate may incur a close-to-40% tax on the excess value.

At the end of 2025, the current exemption level will “sunset” unless Congress acts to extend the current exemptions. This temporary tax measure doubled the estate tax exemption from $5.49 million to $11.18 million. If Congress does not act, the exemption will return to its previous level, plus an adjustment for inflation based on the consumer price index.

Depending upon what happens between now and the end of 2025, the estate tax risk may change. A lower estate tax exemption coupled with the current 2032A exemption will result in major financial difficulty for farm families with low liquidity and high farmland value in excess of the estate tax exemption.

However, a lower estate tax exemption paired with a higher 2032A exemption may save many family farms from having to be sold to satisfy an estate tax debt.

EDITOR’S TAKE:

The debate over estate taxes has a long history, especially among farmers and ranchers. How farmland is taxed after death of a farm principle is a question of great concern to the surviving family members. In some instances, farm families have had to liquidate some or all of their assets simply to satisfy the tax burden. With larger exemption limits, this concern was lowered or eliminated. The biggest challenge is the ever-changing limit levels. With the fluctuation in exemptions comes uncertainty and more difficulty with planning, not to mention the large legal fees every time a plan is updated or changed to accommodate the whims of congress. It would be welcomed news to farmers/ranchers if congress could agree on a limit with an inflationary index adjustment and then let the sleeping dog lie!

In the meantime, let farmers/ranchers in your area know that you support efforts to raise the limits/exemptions for farmland. That you want them to remain in business by not selling assets just because someone passes. Also, let them know they can count on your dealership for the parts, service and new or used trucks that are part of their estate.