Passing family farms and ranches on to the next generation is challenging, and future changes to federal inheritance tax could make this process even more difficult and expensive. Many Montana producers have had to deal with paying the “death tax” for a business that is simply being passed down to the next generation, and this added expense is a serious challenge to the financial viability of the business.
Estate planning is a complicated, time-consuming process that takes away funds and energy from producers who are committed to making sound business decisions for the future. The Montana Stockgrowers Association (MSGA) is keenly aware of this issue and encourages the congressional delegation to move Congress to eliminate or significantly reduce federal estate taxes while maintaining a step-up basis. The following factors are of concern to MSGA and the larger industry.
The next 15 years are going to be especially telling for the future of U.S. agricultural production, with more than one-third of farmland set to change hands. Currently, 97% of the farms and ranches in the U.S. are family owned, and according to the USDA, real estate assets account for an average of 84% of total assets for these operations. To further complicate the future, agricultural land is being purchased and paved over for development at an alarming rate—every day, around 2,000 acres is converted out of agricultural use. In order to preserve agricultural land, it is imperative that operations can be passed down to the next generation without excessive inheritance tax.
The value of an agricultural operation is typically assessed based on liquid assets, like land, equipment and livestock. Special use valuation can help reduce the estate tax for a transitioning operation. Under a special use provision, land is assessed based on the capacity to produce income from livestock and crops, as opposed to its “highest value,” which may be for development. Ensuring that special use valuation is fair and accurate is essential.
The 2017 Tax Cuts and Jobs Act temporarily increased the estate tax threshold to $10 million per individual or $20 million per couple, indexed for inflation, at a rate up to 40%. This is only effective until Jan. 1, 2026, at which time the threshold will be cut back 50% to $5 million per individual, or $10 million per couple. Many Montana farms and ranches have liquid assets far beyond the $5 million per individual/$10 million per couple threshold, meaning many could be subject to a large estate tax bill in the coming years, if the current law is not extended before Jan. 1, 2026.
Evaluating estate taxes on a step-up basis means the IRS resets the asset’s original cost basis to its value at the date of the inheritance, and the heir then pays taxes based on that evaluation. As assets continue to gain value, heirs aren’t required to pay even more in taxes.
There are many challenges facing the next generation, and the reduction of the estate tax threshold after Jan. 1, 2026, will be a huge burden on families transitioning their operations. Congress currently has time to evaluate and determine fair policy for agricultural producers. An elimination or major decrease in estate taxes can help keep agricultural land in production in the future. Keeping agriculture land in food production is critically important for the food security of America. — Monty Lesh, MSGA district director
