Impact of New Tax Act on Farm Succession Planning

By: Jacob H. Kiessling, Esq.

In the closing days of 2017, the federal Tax Cuts and Jobs Act (“Act”) was enacted. Its impact will be felt by virtually every taxpayer on multiple levels. From a farm succession planning standpoint, the most impactful changes include reduction of individual and corporate tax rates, increases in the federal estate and gift tax exclusion amount, preservation of stepped-up basis and continuation of like-kind exchanges for real estate.

In addition to lower tax rates in general for individuals, the owners of pass-through entities (LLCs, S-corporations, partnerships and sole proprietors) who report business profits on their personal tax returns may be able to take up to a 20% deduction against their pass-through income. Corporations will also benefit with the corporate tax rate being significantly reduced from 35% to 21%.

The Act also doubled the federal estate and gift tax exclusion amount from $5.6 million per person to $11.2 million per person. With portability (the passing of a deceased spouse’s unused federal estate and gift tax exclusion amount to the surviving spouse), a couple will be able to pass up to $22.4 million during life and/or at death tax free.

Another change under the Act impacts like-kind exchanges under I.R.C. §1031, commonly referred to as 1031 exchanges. In the past, taxpayers could defer gain on the sale of property (including, but not limited to, real estate, equipment and livestock) held for productive use in a trade or business if such property, or the proceeds from the sale of such property, was exchanged for like-kind property to be held for productive use in a trade or business. The Act has limited the application of 1031 exchanges (like-kind exchanges) to only real estate for tax years beginning in 2018.

Despite the numerous tax changes under the Act, the guiding principles surrounding farm succession planning will, for most Pennsylvania farm families, remain unchanged. It is not recommended that farmers rush to form or convert to corporations; limited liability companies, taxed as partnerships, will continue to be the entity of choice for most farm businesses. As in the recent past, federal estate and gift taxes will not be a concern for most Pennsylvania farmers. Instead, the impetus for farm succession planning will continue to be: the desire to pass the farm business to the next generation, fair distribution of assets among on-farm and off-farm children, preservation of assets from potential nursing homes costs, the potential impact of divorce, and tax considerations, including stepped-up basis.