Gifting

Overview

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.

Farmer Spotlight:

Full and By Farm

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.

What is a Gift?

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.

Consideration

  • In a legal context, “consideration” means payment or money. For example, when a farmer sells land to a buyer in exchange for money, the buyer is giving the farmer “consideration” by paying money for the land. Accordingly, “full consideration” means full payment at the true value of the transferred asset (i.e. land). When an asset, such as land, is transferred from one person to another in exchange for something less than full value, then it has been transferred for less than “full consideration” and is likely considered a gift under federal tax regulations.3

Fair Market Value

  • The IRS measures the fair market value of a gift by asking at what price a willing seller (someone who is not forced to sell and has reasonable knowledge of the property’s worth) would sell the property to a willing buyer.4

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.

What Qualifies as a Gift For Federal Tax Purposes?

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.

Gifts are:

  • The transfer of an asset (something of value) in exchange for nothing (or a significantly lower amount of money).5
    • Gifted assets can include land, farm machinery, and commodities such as livestock and grain;
  • Rent-free use of another person’s home or car;
  • Payments to adult children when those payments aren’t legally required; or
  • Interest-free or below-market loans.

Gifts are NOT:

  • Transfers of assets that the farmer can take back, or retains control over (e.g., a loan of money or equipment, or a market-rate lease);
  • Payments of another person’s medical or education expenses (paid directly to the medical or educational institution);
  • Transfers to political organizations;
  • Transfers to certain exempt charitable organizations;
  • Divorce payments; or
  • Gratuitous services, such as free labor.
  • Note: If a farmer is currently employing an individual who does not fit within the legal definition of a volunteer or independent contractor, that individual must be paid for their work. To read more about which types of farm employment require compensation, click here.

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.

How Do Gifts Work?

Questions To Ask

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.

Can I Avoid Paying Federal Taxes On My Gift?

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.

Key Federal Gift Tax Exclusion and Exemption Categories

  • 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

Lifetime Gift Tax Exclusion

  • Federal gift taxes only kick in after lifetime gifts exceed $5.49 million (2017). Note that even if you don’t owe gift tax in a particular year, you may still have to file federal gift tax returns. Also, while a 5.45 million lifetime gift tax exclusion amount may seem quite high, a significant gift of valuable farmland could easily meet or exceed that amount. As a result, the annual exclusions discussed below can become valuable for farmers who are planning to gift strategically. Additionally, farmers should note that gift exemptions can affect estate tax exemptions,9 so farmers planning large gifts should consult with their estate planning attorney and/or tax advisor.

Annual Gift Tax Exclusion (From Lifetime Exclusion Amount)

  • Each individual currently has an Annual Gift Exclusion of $14,000 per gift-giving person, per gift recipient, per year. This means you can individually give up to $14,000 to as many persons per year as you wish without those amounts counting against the $5.49 million Lifetime Gift Tax Exclusion amount. For example, if a widowed farmer gives three children $14,000 each in 2017, these gifts are excluded for tax purposes because they don’t exceed the annual exclusion. Married gift givers who own property together can treat a gift as though each spouse has given half of it, so that together, married spouses can give up to $28,000 per recipient per year under the annual exclusion.10 If an individual gift is over the $14,000 exclusion amount, the amount of the gift that is over $14,000 will count against the gift giver’s Lifetime Gift Tax Exclusion (see example below), but the first $14,000 of that gift will not count against it.11 12 In any case, gift tax forms (IRS Form 709) must generally be filed for any gift that exceeds the $14,000 annual exclusion ($28,000 per married couple). Note also that special rules may apply to gifts of grain, market livestock, machinery, land, or contract for deed payments.13

Tuition and Medical Payment Exemption

  • If a farmer is directly paying for another individual’s education or medical expenses, those expenditures do not qualify as gifts for federal tax purposes. In order to qualify for the exemption, tuition or medical payments must be made directly to the educational or medical provider (not to the individual incurring educational or medical costs). Such gifts may be up to any amount.14

Exemption for Gifts to Spouses (Marital Deduction)

  • The term “spouse” includes same-sex individuals who are lawfully married.15 Gifts to a spouse may be up to any amount and do not count against the Lifetime Gift Tax Exclusion.

Exemption for Gifts to a Political Organization

  • For tax purposes, gifts of money and property to a political organization for the organization’s use are exempt from federal taxes. This exemption only applies to organizations that meet the Internal Revenue Code’s political organizations definition.16 17

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.

How Do Gifts Relate to Farm Transfer?

Senior Farmers May Want To Gift If:

  • They want to help a beginning farmer who may not have the financial resources to access farmland or start a farm business.
  • They can afford to give up ownership of certain cash, property, income, and/or assets.
  • They can pay any potential gift taxes, and they can file required tax forms even when no tax is due.
  • They want to reduce the amount of their estate for the purpose of paying less in estate taxes.
  • They will not be applying for Medicaid within five or more years and/or are not concerned about exceeding the Medicaid asset limit during this five-year lookback period.

Junior Farmers May Want To Accept A Gift If:

  • They can pay any required taxes associated with the gift, either immediately or in the future (e.g., property taxes).
  • They are comfortable receiving cash or an asset (e.g., land or farm equipment) for nothing or for far less than the asset is worth.
  • They can use the gift as the gift giver intended, or are comfortable making independent use of the gift.

Pros and Cons

Senior Farmer Advantages

  • 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.

Senior Farmer Disadvantages

  • 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.

Junior Farmer Advantages

  • 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.

Junior Farmer Disadvantages

  • 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.

How An Attorney Can Help

The Attorney’s Role

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.

How An Attorney Can Help With Gifting

  • Provide advice on whether giving or receiving a gift makes sense financially and/or meets farm transfer goals.
  • Help a farmer legally go about making a gift. This includes properly documenting the gift and filing the appropriate paperwork.
  • Help determine tax and tax filing obligations at both federal and state levels.
  • Help farmers gift strategically, keeping in mind a farmer’s individual family and financial situation, estate planning strategy, and overall goals.

Additional Resources

Related Legal Tools

Healthcare Planning
Protect farm legacies by planning for the cost of long-term care.
Wills
Learn how to use a will as part of a successful farm transfer plan.
Trusts
Trusts can provide a smooth transfer from one generation to the next.

Footnotes:

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