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.
In many ways, James Graves and Sara Kurak, owners and operators of Full and By Farm, represent the typical beginning farmers of the new food movement. The process of finding land was not a quick one.
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.
Farmer Gift Example
In return for a $5,000 payment, a senior farmer gives her tractor worth $100,000 to a junior farmer.
The $5,000 payment from the receiving farmer would not be enough to count as “full consideration” for a tractor worth $100,000. Thus, the senior farmer has “gifted” her tractor – even though she did receive some payment from the junior farmer. The $5,000 is “less than adequate consideration” for a tractor worth $100,000.
The value of the senior farmer’s gift would be $95,000. This value is calculated by subtracting the $5,000 payment from the $100,000 full value of tractor.
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:
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.
Federal Tax Gifting Example:
In 2017, a farmer gives two favored relatives $20,000 each and gives a third relative $10,000. The two $20,000 gifts are called taxable gifts because they exceed the $14,000 annual exclusion. But the farmer won’t actually owe any federal gift tax unless she has exhausted her lifetime gift exclusion amount. Assuming she hasn’t used up the $5.49 million lifetime gift exclusion, the two $20,000 taxable gifts simply reduce the farmer’s lifetime exemption by $6,000 each, for a total of $12,000 [($20,000 – $14,000) x 2 = $12,000]. The farmer will also have to file tax paperwork related to the two $20,000 taxable gifts. The $10,000 gift is ignored for federal gift tax purposes and won’t count against the farmer’s lifetime exemption because it is below the $14,000 annual per recipient exclusion.
Ten years later, in 2027, the same farmer wants to retire and, after consulting her estate planning attorney and tax advisor, gifts her daughter the entire farm. The farm is worth $7 million. The farmer will have to pay gift taxes on at least: 1) the amount of that $7 million that exceeds the farmer’s lifetime gift exclusion; plus 2) the amounts the farmer gifted in past years that counted against her lifetime exemption (for example, the $12,000 in 2017). There may also be estate tax consequences that the farmer should work out with her estate planning attorney and tax advisor.18
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.
Senior Farmers May Want To Gift If:
Junior Farmers May Want To Accept A Gift If:
It’s not an attorney’s job to make decisions for farmers or to set farm transfer goals. Instead, attorneys can provide information about pros and cons of different options, advice about what is common versus unusual, fair versus unfair, etc. Attorneys can help farmers understand the universe of possible farm transfer goals and help narrow down individual options so that farmers can make final decisions.
1. Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes; 26 C.F.R. § 25.2511–1, Treas. Reg. § 25.2511–1; Treas. Reg. § 25.2512–8.
2. 26 U.S.C.A. § 2512.
3. Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes.
4. Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes.
5. Gary A. Hachfeld, et. al., Gifting Farm Assets, University of Minnesota Extension Estate Planning Series (2016), http://www.extension.umn.edu/agriculture/business/farm-transfer-estate-planning/docs/trans-series6-gifting-farm-assets.pdf.
6. Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, Internal Revenue Service, https://www.irs.gov/pub/irs-pdf/i709.pdf.
7. Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes.
8. See Joel Michael, “Survey of State Estate, Inheritance, and Gift Taxes,” Minnesota House of Representatives Information Brief, at 10-15, http://www.house.leg.state.mn.us/hrd/pubs/estatesurv.pdf.
9. Note that each individual, for the purpose of both federal estate and gift tax purposes, has one lifetime exclusion amount. Individuals do not have a $5,450,000 exclusion for estate tax and a second exclusion of $5,450,000 for gift tax. Each person has one exclusion amount and must decide how to spend that exclusion amount – on estate taxes or gift taxes or a combination of both. Gary A. Hachfeld, et. al., Gifting Farm Assets, University of Minnesota Extension Estate Planning Series (2016), http://www.extension.umn.edu/agriculture/business/farm-transfer-estate-planning/docs/trans-series6-gifting-farm-assets.pdf.
10. Gary A. Hachfeld, et. al., Gifting Farm Assets, University of Minnesota Extension Estate Planning Series (2016), http://www.extension.umn.edu/agriculture/business/farm-transfer-estate-planning/docs/trans-series6-gifting-farm-assets.pdf.
11. “The Gift Tax Made Simple,” TurboTax.com (2016), https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html.
12. Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes.
13. Gary A. Hachfeld, et. al., Gifting Farm Assets, University of Minnesota Extension Estate Planning Series (2016), http://www.extension.umn.edu/agriculture/business/farm-transfer-estate-planning/docs/trans-series6-gifting-farm-assets.pdf.
14. IRC 2503(e)
15. Seven Tips to Help You Determine if Your Gift is Taxable, IRS.gov, https://www.irs.gov/uac/Seven-Tips-to-Help-You-Determine-if-Your-Gift-is-Taxable.
16. The term “political organization” means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function. 26 U.S.C.A. § 527.
17. The term “exempt function” means the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. Such term includes the making of expenditures relating to an office described in the preceding sentence which, if incurred by the individual, would be allowable as a deduction under section 162(a). 26 U.S.C.A. § 527
18. “The Gift Tax Made Simple,” TurboTax.com (2016), https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html
The Center for Agriculture and Food Systems is an initiative of Vermont Law School, and this toolkit provides general legal information for educational purposes only. It is not meant to substitute, and should not be relied upon, for legal advice. Each farmer’s circumstances are unique, state laws vary, and the information contained herein is specific to the time of publication. Accordingly, for legal advice, please consult an attorney licensed in your state.