Updates on federal estate and gift tax issues

This post is long overdue but, as we know, there has been a lot of activity in the past few months for farmers and ranchers.  But now that we have a Farm Bill, it is time to look at what 2014 holds for federal estate and gift tax issues.

First, the annual gift tax exclusion:

We’ve previously discussed the annual gift tax exclusion.  For 2014, the annual gift tax exclusion remains $14,000.  What this means is that an individual can gift up to $14,000 per year to as many individuals as you’d like without tax implications.    In other words, you can gift up to $14,000 per year to each of your children, each of your grandchildren, or any other individual you’d like.

Second, the unified credit:

There is another gift tax issue beside the annual gift tax exclusion — for gifts over $14,000 to an individual in a year.  This is the estate and gift tax, or more commonly known as the unified credit.  For 2014, the estate and gift tax exclusion is $5.34 million.

But what does that mean?  It means an individual can gift up to $5.34 million dollars before any gift tax will be assessed.  It also means an individual can transfer $5.34 million at death before any estate tax will be assessed.  It also means that the gift tax and estate tax are unified, meaning an individual can only gift or transfer $5.34 million before the tax is assessed.  In other words, an individual can gift $2 million and transfer $3.34 million and no tax will be assessed.  Alternatively, if an individual gifts $3 million and transfers $3.34 million, tax will be assessed on $1 million ($3 million + $3.34 million – $5.34 million = $1 million).

Even if your assets and/or net worth does not approach $5.34 million (or $10.68 million if married), estate planning is well worth your time.  You will still want to consider who will inherit your assets, how you want those assets inherited (e.g. will, trust, shares of a business), and, if you have minor children, guardianship.  You will also want to consider the costs of probate versus the costs of trusts, powers of attorney and health care, and end-of-life care.

Estate planning is for everyone, not just those who may have assets that go above the federal estate and gift tax exemption of $5.34 million.  It is worth the time to consider what you need and want and then take the necessary steps to ensure those needs and wants can and will occur.

Commodity programs update

As you likely know, there are many changes afoot in the commodity programs.  Direct payments and ACRE are being replaced by two new programs: price loss coverage (PLC) and agricultural risk coverage (ARC).  Note that ARC can be a county revenue program (county ARC) or an individual farm revenue program (individual ARC) and differences between the two will be discussed more fully below.

You have a one-time opportunity to make an election in 2014.  The election will cover the 2014 through 2018 crop years.  If an election is not made, a producer will be automatically enrolled in PLC.

This post will discuss some commonalities between the programs and then the differences.


Base acres are used for PLC, county ARC, and individual ARC.  Producers will have a one-time opportunity to retain current base acres or reallocate their base acres based upon production from 2009 to 2012.  If reallocation is selected, base acres will be in proportion to the four-year average of acres planted to the covered commodity, including prevented planting acres.  However, reallocation cannot result in an overall increase in base acres.


Price Loss Coverage:

Price Loss Coverage (PLC) is, at its heart, a price program.  If an election is not made, a producer will automatically be enrolled in PLC.

PLC is coverage on a crop-by-crop basis.  Payments will be made if the U.S. average market price for the crop year is less than the crop’s reference price.  Relevant reference prices include:

  • Wheat: $5.50/bushel
  • Corn: $3.70/bushel
  • Grain Sorghum: $3.95/bushel
  • Barley: $4.95/bushel
  • Oats: $2.40/bushel
  • Soybeans: $8.40/bushel

Payments are 85% of the farm’s base acres for the covered commodity.  Finally, the payment yield may be updated to 90% of the farm’s average planted yield over the 2008 to 2012 crop years.

County ARC:

Like PLC, county ARC is on a crop-by-crop basis.  Payments occur when the actual crop revenue is below the ARC revenue guarantee for a crop year.  The revenue guarantee is calculated by multiplying the average county yield for the commodity in the current crop year by the higher of the marketing year average for the commodity or the commodity’s loan rate.

Payments are made on 85% of base acres.   How is the revenue guarantee calculated?  First, the county Olympic average for the past five crop years.  This means the high and low averages for the past five years are dropped and the remaining county yield averages for the past five years are averaged.  If a crop yield is below 70% of the transitional yield for crop insurance, the county yield for that crop year is replaced with 70% of the transitional yield.

Second, the 5-year Olympic average for national marketing year average prices for the commodity is made.  If any of the five years has a national price average below the PLC reference price, the reference price is used in calculating the 5-year Olympic average.

Third, the 5-year county Olympic average of county yields is multiplied by the 5-year national Olympic average to determine benchmark revenue.  The County ARC revenue guarantee then equals 86 percent of the calculated benchmark revenue.  If actual revenue falls below the guarantee, County ARC triggers a payment rate equal to the difference.  The payment rate is capped at 10 percent of the benchmark, setting coverage from 86 percent to 76 percent of the benchmark county revenue.

Individual ARC:

Unlike PLC and county ARC, individual ARC applies to the entire farm and not on a crop-to-crop basis.  As such, individual ARC is based upon the average covered commodity experience on the farm.

Payments are made when actual revenue falls below the revenue guarantee.  However, the payment is for 65% of the sum of the farm’s total base acres.

How are payments calculated?  Actual revenue uses a weighted average of the actual revenues for each covered commodity.  The weights used to compute the average reflect the amount of acreage planted to each crop in the given crop year.  Actual revenue for each individual commodity equals the yield for that commodity multiplied by the price, which is the higher of the commodity’s marketing year average and loan rate.

Benchmark revenue is calculated using the revenue for each commodity for the 5 most recent crop years; the revenue is calculated by multiplying the yield and national average price for each year.  Just like County ARC, low yields in individual years are replaced by 70 percent of the transitional yield and the PLC reference price will replace any actual prices falling below that level.

Once the revenue for each year is calculated, the 5-year Olympic average of that commodity’s revenues is calculated. The Individual ARC Benchmark Revenue then uses the crop-specific Olympic averages to compute a weighted average whole-farm revenue, where the weights are based on planted acreage for each commodity.  The Individual ARC Revenue Guarantee is set at 86 percent of that benchmark revenue.  Like county ARC, the payment rate is the difference between the revenue guarantee and the actual revenue, but capped at 10 percent of the benchmark revenue resulting in coverage between 86 percent and 76 percent of the benchmark.

Other Issues:

Payment limitations remain for commodity payments.  For a person or entity, the payment limitation is $125,000.  For a person and spouse, the payment limitation is $250,000.  Additionally, the USDA is charged with drafting new regulations for “active engagement in farming”.

What’s in the Farm Bill for Beginning Farmers?

This post does not promise to be a comprehensive review of all the new programs and funding in the new Farm Bill.  Rather, it is a short review for you to begin to think about ways in which you can potentially use some new programs or additional funding in the Farm Bill for your own operation.  (For a thorough review of the beginning farmer initiatives, click here.)

So what’s in there?

  • Additional funding for beginning farmer and rancher training and outreach programs.  This website and program is funded via the Beginning Farmer and Rancher Development Program.  That program has received additional funding with a new emphasis on military veteran farmers.
  • Enhanced premium subsidies for crop insurance.  The enhanced subsidy of 10 percent points is only for a beginning farmer in the first five years of his/her farming career.
  • The Farm Service Agency’s microloan program becomes permanent.  For beginning and military veteran farmers, microloans will no longer have a term limit.
  • Additionally, the FSA will continue to prioritize beginning farmers in its direct and guaranteed farm ownership and operating loan programs.
  • NRCS’ EQIP program will continue to cost-share with beginning, limited resource, and socially disadvantaged farmers.  Additionally, while a farmer can current receive up to 30% of a project’s cost in advance, the new farm bill increases the possible cost-share to 50%.
  • Land access is obviously an important topic and there are some new initiatives for beginning farmers.  The FSA Down Payment Loan Program increases the value of land eligible from $500,000 to $667,000. A new Agricultural Conservation Easement Program, per the Land Trust Alliance:

The Agricultural Lands Easement program (ALE) combines the Farm and Ranch Lands Protection Program (FRPP) and Grassland Reserve Program (GRP). ALE is part of the larger Agricultural Conservation Easement Program (ACEP), which also contains the former Wetlands Reserve Program (WRP).

  • There are some additional provisions, such as conservation funding and a return of the Transition Incentive Program (with an increase in funding) administered by the FSA.  There are also some clarifications within the Value Added Producer program defining beginning farmer status in multi-applicant applications.

Overall, there are some interesting opportunities for beginning farmers and ranchers in the new Farm Bill.  As the new programs, additional funding, and more details become available, we’ll know more about how to maximize use of the programs for specific types of operations.  But as of now, there appears to be a significant amount of promise in the new Farm Bill for beginning farmers and ranchers, socially disadvantaged farmers, and veteran farmers.


The latest on land valuation

As it is cold and snowy outside, it seems as good of time as any to look at new research on land valuations in Nebraska, South Dakota, and elsewhere.

First up is a new report from Farm Credit Services of America.  Farm Credit’s report of shows a potential leveling off of the market for farmland based upon two reports.  The first report, the Benchmark Land Values survey tracks the value of 65 farms for more than three decades.  The Benchmark shows, based upon the previous six months, the average change in valuation for Nebraska farms at 0.7% and South Dakota farms at 7.2%.  Of potential note, Iowa’s previous six month valuation shows a decrease of 2.8%.

The second report used by Farm Credit is an analysis of more than 3,500 agricultural real estate transactions in Iowa, Nebraska, South Dakota, and Wyoming.  While demand remains strong, the number of land auctions decreased from 2012 to 2013.  Some highlights from the report:

  • South Dakota unimproved cropland values have steadily increased for the last three years and are currently selling at all-time highs with premium ground bringing up to $12,000 per acre.
  • Nebraska dry cropland prices have had significant price swings over the last two years. For the fourth quarter of 2013, prices increased by 15 percent to $5,900 per acre. The price per acre for 2012 and 2013 was $5,500 on average.
  • Nebraska irrigated cropland prices continued to rise, selling at all-time highs of $8,100 per acre. Land prices increased 6 percent during the fourth quarter of 2013. For all of 2013, prices were up 4.4 percent compared to 2012.

Also released recently in the Kansas City Federal Reserve’s Agricultural Credit Survey.  The survey indicates year-to-year gains, ending in September 2013, for irrigated, non-irrigated, and ranch land.  Year-to-year valuations for Nebraska remained strong, with Nebraska showing gains of 13.1% for non-irrigated land, 20.4% for irrigated land, and 19.5% for ranch land.  Of note, the surveyed bankers anticipate a plateau of valuation at the end of 2013 and into 2014.  In other words, valuations will remain steady.

Whether the above is good, bad, or indifferent news depends upon the point of view of each farmer or rancher.  And the above certainly doesn’t capture the fluctuations in the commodities markets either.  But land valuation is something to keep an eye on heading into the 2014 season, if only to have an accurate idea for your net worth statements and, if applicable to your operation, cash rental rates.

As for beginning farmers, while valuations remain high and demand strong, a leveling of valuations may be some slightly good news.  If valuations remains stable, it is possible to plan for purchasing property without having to account for double-digit increases year-to-year.  So beginning farmers, even if you do not currently own property, keep an eye on the valuations and plan accordingly.

The Farm Bill moves forward and some other notes of possible interest

Farm Bill Update:

The last time we checked in with the Farm Bill, it was nearing passage in the House.  A week later, where are we?

First, the Farm Bill did pass in the House and moved to the Senate.  The Senate is advancing towards final passage of the Farm Bill today.  The linked article also delves into details about the new crop insurance program and the consequences for farmers.  Of note, the Farm Bill is passing with wide bipartisan majorities in both the House and Senate.

President Obama is expected to sign the Farm Bill.

Over the next few weeks, we will explore the new crop insurance programs included in the Farm Bill and the possible ramifications to your operation.

Other Possible News of Interest: