Gifting

1. Overview
2. What Is a Gift?
3. How Do Gifts Work?
4. How Do Gifts Relate to Farm Transfer?
5. Advantages and Disadvantages of Gifts
6. How an Attorney Can Help
7. Additional Resources

A gift is a transfer of an asset (something of value) from one person to another in which the gift giver receives no payment (or a payment of less than equal value) in return. Farmers may consider gifting as an option if they are financially able to gift land, equipment, livestock, or other assets and are also able to pay any related gift taxes.

Gifting can be an opportunity for senior farmers to help junior farmers access farmland or begin farming, and can reduce tax obligations in some circumstances. However, senior farmers should note that the timing of gift giving may affect eligibility for Medicaid long-term health care assistance. Gifting can also require tax filings (even when no taxes are actually due), and can affect estate planning and estate taxes. As a result, it is important for farmers to plan ahead, consult with legal and tax advisors, and be strategic when considering significant gifting of farm property or other assets.

A gift is generally a transfer of an asset (something of value) from one person to another in which the person receiving the gift pays either a price considerably lower than the gift’s value or nothing at all.¹

The Internal Revenue Code provides the definition of a gift for federal tax purposes: “Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift.”²

In other words, for tax purposes, if a gift giver (“donor”) gives property (i.e., cash, land, or farm equipment) to a gift recipient (“donee”) in exchange for nothing or for an amount below fair market value, the donor is said to have made a gift. Again, this definition is for federal tax purposes. Below are the definitions for some important terms used in the IRS federal tax definition above.

Below are examples of what type of transfers would count as a gift under federal tax regulations. Farmers should note that some of the “Gifts are NOT” examples below would generally be thought of as gifts from a social perspective, but do not count as gifts for federal tax purposes.

Whether or not something is a gift for legal and tax purposes most often depends on tax regulations. IRS publications, such as the instructions for filling out a gift tax return⁶ (IRS Form 709), can be very helpful in determining filing and tax payment obligations related to gifts. An estate planning attorney or tax preparer can also provide guidance for farmers.

After deciding to give a gift, some of the important questions are:

• Is the gift defined as a “gift” for purposes of federal taxes (in other words, does the IRS consider your gift potentially taxable)?
• If your gift falls under the IRS definition of a gift, do you have to pay federal taxes on the gift?
• Or, does your gift fall into a gift tax “exclusion,” meaning you don’t have to pay federal taxes related to the gift?
• Do you need to file a gift tax return (even if you don’t owe any gift tax)?
• Are there any state tax regulations that apply to your gift? Do you need to file a state gift tax form?

The following information will help answer these questions, but farmers should also consult with a tax advisor and/or estate planning attorney.

Does My Gift Fall Into A Federal Gift Tax Exclusion or Exemption?

Gift givers are generally required to pay a federal gift tax unless the gift falls into a particular “exclusion” or “exemption.” If farmers fail to pay required gift taxes, the tax may be imposed on the gift recipient. A gift recipient (or donee) can also choose to pay the gift tax in some situations.⁷

Residents of some states may be required to pay a state gift tax on top of any federal gift taxes.⁸ Check your state’s tax laws or ask an attorney or tax advisor to find out whether additional state gift taxes could apply to your planned gift.

• Lifetime Gift Tax Exclusion (Approximately $5.5 million in 2017)
• Annual Gift Tax Exclusion From Lifetime Amount ($14,000 or less per gift recipient, per year)
• Direct Tuition and Medical Payments Exemption
• Gifts to Spouses Exemption
• Gifts to Political Organizations Exemption

Note that gift tax laws and the tax consequences of different types of gifts are complex and are different according to each person’s individual situation. The information contained here is simply an overview of some of the most common gift-related tax exclusions and exemptions that farmers might encounter. It is critical that farmers consult with tax advisors and/or an estate planning attorney to understand how gifting can affect their financial situation and tax obligations.

• Opportunity To Help the Next Generation of Farmers. Gifting assets to the entering farm generation can be a valuable tool in the farm transfer process. If a new farmer is struggling to either acquire land or is not in sufficient financial standing to start farming, a senior farmer may gift money, land, farm equipment, and more to a beginning farmer.
• Fewer Estate Taxes. Once a gift is given, it is no longer considered to be part of the gift giver’s estate. Depending on the gift giver’s individual circumstances, this may reduce the gift giver’s estate taxes.
• Forgoing Income Tax Obligations. If a farmer gifts a farm business to another individual, the donor farmer will no longer have to pay taxes on the income the farm is making because the donor farmer no longer owns the farm business. These income tax obligations could be transferred to a recipient who may be in a lower tax bracket, and the recipient will consequently be required to pay fewer taxes on the income from the farm business.

• Control Over Assets. Once a farmer makes a gift of money, land, or other property, the farmer loses control of the gifted assets. Additionally, the farmer is no longer entitled to the income stream associated with the gifted assets. For example, if a farmer decides to gift a share of a farm business, the farmer can no longer claim the profits associated with that share. Don’t gift an asset or income that you cannot afford to give up. If gifting jeopardizes your financial security or violates your farm transfer or estate planning goals, it is wise to reconsider that gifting strategy.
• Effect on Medicaid Eligibility. If a farmer makes a gift within five years of applying for Medicaid, he or she may risk or delay their Medicaid eligibility. To read more about long-term health care implications, click here.
• Effect on Estate Taxes. Gift giving may affect a farmer’s estate plan and estate taxes. Farmers planning to incorporate gifting into a farm transfer plan should consult with an estate planning attorney and/or tax advisor.

• Help Getting Started. For junior farmers who need assistance financially or in regards to acquiring land to start farming, a gift of a farm business, land, equipment, or money may be a great help.

• Tax Obligations. Because a junior farmer becomes the owner of an asset once the junior farmer receives a gift, the junior farmer must pay the taxes associated with it. For example, if a beginning farmer receives a plot of land for a gift, he/she must pay associated property taxes. This may be an issue for beginning farmers who do not have the financial means to afford the taxes on valuable farmland.
• Strings Attached? Although a gift giver gives up the legal right to control over gifted assets, junior farmers should consider whether the gift actually comes with “strings attached” from a social and emotional perspective.

Additional Resources

• US Tax Center – 7 Steps to Determine if a Gift is Taxable
• IRS.gov – Frequently Asked Questions on Gift Taxes
• University of Minnesota Extension – Gifting Farm Assets
• Turbo Tax – The Gift Tax Made Simple
• IRS.gov – Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return