Big picture tax and estate planning amid the political uncertainly of 2021

By Matt Reese

The current confusing mess of tax proposals and discussions in Washington, D.C., paired with strong crop prices, astounding increases in input costs, and an undependable supply chain has many farmers looking at big picture decisions for the farm for the remainder of 2021. With so many unclear and competing factors, it can be hard to know what to do both long term and short term for farms.

Mike Weasel is the director of business development for Wilson National, LLC and has seen continued strong prices for farmland, but also a confounding list of challenges for the farm sector. 

“John Stevenson was a good friend of mine who always told me, ‘Mike, you need to remember agriculture is a long term business,’ to which I’d say, ‘John you have to survive the short run or it doesn’t matter,’ and I think I’d say the same thing today,” Weasel said. “The capital gains issue concerns an awful lot of people who we talk with. The step-up in basis issue and the politics of this is pretty significant. With that, the market has really been very strong the last 12 to 15 months. We have had a couple of really high auctions in Union County and Madison County recently. I have had 7 calls in the last month or so, all wanting to buy. I am old enough to think that this has to slow down. It is unsustainable, but having said that, there does not seem to be any indication that it is going to slow down.” 

The high costs of farm inputs has not slowed increasing land prices.

“Even with the high input costs, they are still looking at 2% or 3% return on the land and the owner/operator is pretty sure he can do better than that. They are influencing a lot of the sales,” Weasel said. “If you are seriously considering selling land, you should consider an auction. Auctions drive it much more than private treaties. Do your homework. Prices are historically high right now.”

Doug Walton, with United Country Real Estate and Walton Realty and Auction Co., LLC, is seeing similar trends in his Wyandot County-based business.

“We are seeing some seller activity as of right now. We have 8 land auctions booked for November and we are also seeing a lot of buyers entering the market if they can find something to buy. Money seems to be the least problem they have. The problem is finding those acres to add to what they already have,” Walton said. “On your best ground that is tiled and have the soil types, you are still going to see percentage up. On the mediocre to lower soils I think we’ll maybe see those start to level off, but we have seen higher prices since spring. It is nothing to see an $8,000 to $10,000 farm. There is a lot of old money in the market yet that is being spent.”

The high prices translate into higher risk for buying land, especially for young farmers.

“Plan your budget ahead of time. Don’t walk in and just bid for the sake of buying a piece of ground. Of course, none of it is made anymore but there is always some land for sale somewhere,” Walton said. “It makes sense to go with a budget and a plan, and not just get caught up in the whirlwind price. If it is a young couple and they come to us for advice that is one thing we always tell them. Make sure you plan for what your position needs to be. If you want to be in the business 10 or 15 years from now, you’ve got to go in with a budget where it is fairly close to paying for itself.” 

Used equipment prices too are very strong right now.

“The shortage of parts has created tremendous demand for used farm machinery,” Walton said. “It is through the roof, especially if it has been cared for well. It is turning the market clear around.”

The high prices for land and equipment are catching the attention of farmers considering retirement.

“We are seeing a few people at retirement age that feel like we are at the height of machinery and land and they are ready to book a sale. There is a little more interest there than we have seen the last 12 or 18 months,” Walton said. “But we are living in tumultuous times. There are a lot of unanswered questions and uncertainty of where we are headed. There are a lot of variables here at play. Interest rates coupled with higher input costs could slow this down. It seems like every time the farmer gets a break with higher prices, the inputs automatically follow suit and those input prices never back off once they get up.”  

When the political debates at the federal level get mixed in, confusion and panic can ensue. Ryan Conklin, an attorney with Wright and Moore in Delaware, encourages a careful, thoughtful approach to making decisions regarding these political debates.

“We get quite a few clients who call in and are in a bit of panic and concerned about what these proposals will do to their farms or families. These proposals come out all of the time. Some of them are good for ag and some are bad for ag. The President cannot change tax law on his own. It has to go through Congress and we have all watched how slowly it takes legislation to move through Congress. Those tax code changes take quite a while and thankfully gives us some time to prepare and educate our clients,” Conklin said. “The step-up in tax basis elimination is a change in the tax code that would impact farmers and families from small all the way to large. It is non-discriminatory in terms of size and makeup of family and operation. It would be very challenging to plan for farms if that change went into effect. The estate tax exemption — with the existing law it comes back down to $6 or 6.5 million in 2025 anyways — so many estate planners have not changed our mindset with this because we assume most clients are going to live past that sunset date anyways.”

With these issues and numerous others in the midst of very confusing (to put it mildly) and politically motivated discussions at the federal level, it can be hard to know the best course of action before the end of 2021.

“There are a couple of major bills just starting to come out of committee in the House. Out of those conversations we are starting to see what the tax change priorities start to look like with those bills. Any action that a farmer is trying to take before this feels premature. You can run to your attorney’s office and start gifting away land or equipment because you feel like the sky is falling. But in the end, you can do more harm than good by making those premature actions before you know what the tax changes will even be,” Conklin said. “The best approach is do not wait until the very end to engage your tax professional and legal professional. Be in contact with them and have a plan in place for what happens if some of these tax changes do come to fruition. If something does change in part of the tax code, will you get out of the combine, run to the lawyer’s office and start planning accordingly, or will you be three steps behind without a plan? Have those conversations, have a plan in place and also take time to really read up on what the proposals look like and how those possibilities will sort themselves out. Farmers are great planners. In a normal year tax planning may have started a couple of months ago. This year is different and you may be looking at some changes that are effective Jan. 1 that you were not planning for. Have your professionals identified and make sure they are keeping tabs on these areas. They could be substantially impactful on your farm operation if they go through.” 

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