The Farm CPA: Tax Reform and Estate Tax Examples

We are hearing chatter from the Senate about not allowing for a full elimination of the estate tax but rather one of the following:
•Double the Lifetime Estate Tax Exemption and keep Step-up on Assets
•Eliminate the Estate tax and Eliminate the Step-up on Assets above the lifetime exemption amount

I thought I would look at a couple examples to see which would fare best under either of these two options.

Example # 1 - A good size farm operation with no land. Total fair market value of the assets are $25 million and the tax basis is zero (all of the assets are accounts receivable, inventories, prepaid farm expenses and farm equipment that has been fully written off). For this example, we will assume there is no debt in the operation and the farmer is not married and has no other assets. If the lifetime exemption is doubled that will equal $11.2 million for 2018 (current lifetime 2018 exemption is $5.6 million). Therefore, the estimated estate tax will be $5.52 million (40% of $13.8 million). If there is no estate tax, but the step-up is equal to the lifetime exemption, then the heirs will only get to step up $11.2 million of assets. Assuming a combined 30% tax rate on the sale of assets, this will yield income tax of about $4.14 million (spread over several years). In this example, it is better to eliminate estate tax and limit step-up.

Example #2 - The same as number one, however, there is $14 million of debt in the business so the net worth is now $11 million. Under this example, there is no estate tax, but reduced step-up still results in about $4 million of additional income tax owed by the heirs.

As you can see, either of these options may result in a better tax situation depending on the mix of debt and net worth. I originally thought that these two proposals might be close to a wash assuming the tax rates were similar. However, in the situations where a farm operation has a lot of assets that would get a full step-up in basis but also has a lot of debt associated with those assets, the elimination of the estate tax with a reduction to the step-up allowed starts to become very problematic for those estates under the lifetime exemption amount on a net basis but are well over it on a gross asset basis such as example #2.

We know it is still early in the process, but it does appear it will be very difficult to get a full estate tax elimination in the Senate at this time.

We will keep you posted.

Editor’s Note: Paul Neiffer is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog on, he provides analysis and insight to farmer tax questions.