By Collin C. Peterson
August 3, 2021
Stepped-up basis is not the target; the real threat is the transfer tax that would have to be paid to use stepped-up basis
Like most everything else in Washington D.C., there is misinformation being put out either on purpose or because of a lack of understanding about what is going on with estate tax proposals. Most of the talk you hear in agriculture these days is how the “step up in basis” will be eliminated under President Biden’s American Families Plan. There are also issues facing us like treatment of capital gains, but that discussion is for another time.
“Stepped-up basis” is a tax term that applies when property is valued at the amount it is worth when a benefactor dies and leaves the asset to the beneficiary, and not on the original value or basis. Farm assets like land are often passed down through generations of families, and therefore benefit from a step up in basis.
The reality is, under the American Families Plan, stepped-up basis is not under threat of elimination, rather, the proposal would incur a transfer tax that would have to be paid in order to use stepped-up basis in the event of a sale or a death.
When I was a CPA and sat across the desk from farmers giving advice on estate planning, we did not have to worry about the kind of issues facing us now. Things like the amount of exemption, tax rate and valuation issues were critical to the conversation, but nothing like what is being proposed with this transfer tax was ever on the table.
Over the years we fought to get the estate tax exemption raised and to keep the step up in basis system, and the law is now a culmination of policies that work well for farmers. I would argue this transfer tax, which could be as high as 43.4 percent, is the worst idea that has been proposed in terms of its impact on agriculture in my lifetime. This proposal is a direct assault on agriculture because it will prohibit the transfer of a family farm from one generation to the next which is the last thing we should want to do.
If this proposal becomes law, you could have a situation where upon the death of a farmer, his family will owe more than the equity that they have in the farm operation. Just the specter of that occurring would make it difficult for bankers to loan money, because there is no way to know what’s happening with the value of the operation and its assets.
Back in 2017, we raised the estate tax exemption from $5 million to $10 million indexed for inflation (currently $11.7 million per taxpayer). After 2025, the exemption will revert back to little more than $6 million. While some people will want to make a big fight out of that, the reality is that keeping the system we have at that lower level would be significantly better than what is being proposed in the American Families Plan. The estate tax, whether at $6 million or $11 million, will affect only a select few. This transfer tax would affect virtually every farm family and bring uncertainty that diminishes their ability to attain credit.
This transfer tax proposal doesn’t likely have a chance of passing the Senate under regular order. However, there is a danger that with the partisanship going on in Washington D.C., the proposal could go into a reconciliation bill without having anybody in the room who really understands the severity of this change and get passed into law.
At the end of the day, those of us who support family farms and ranches have a big job on our hands making the case for why the tax system we fought for over the years should be maintained. We also need to educate Members of Congress who have good intentions but really don’t understand how devastating these changes would be to maintaining the family farm in America.
We need to fight to keep the current estate tax system that we worked so hard to develop and convince policy makers to drop this idea of the transfer tax. If a change like this is adopted, agriculture as we know it will disappear and may never recover.
Mr. Peterson is former Chairman of the House Agriculture Committee and represented Minnesota’s Seventh Congressional District as a Democrat from 1991-2021. He was one of the few CPAs to serve in Congress. He is President and Founder of The Peterson Group.