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Uncertainty in Succession: A Sweet Spot Between Estate and Income Tax

Writer's picture: David GeigerDavid Geiger

Written by: David Geiger

Edited by: Dave Price

 


Without quick movement on tax legislation, there is an air of uncertainty for succession planning. Eight years ago, Congress raised the federal estate tax exemption to $13.9 million per person, but that could expire this year. However, it seems unlikely that Republicans, who hold majorities in both chambers of Congress under President Donald Trump, also a Republican, would fail to agree to a new tax cut bill.


If the 2017 Tax Cuts and Jobs Act expires, tax policy could revert to a $5 million federal estate tax exemption. And whether it's the former or latter amount, every dollar afterwards is taxed at 40%. That tax level complicates land transfer and ownership.


RELATED: Iowa State University’s Center for Agriculture Law and Taxation writes on how expiring tax provisions are a big issue for 2025. Read its post here. 



"The trouble is, what if they don't?” Hodges asked, “What if this drags on to the fall? Then, the attorneys are going to be super busy, the evaluation folks are going to be super busy, and you may be outside of your window."


Speaking to a group of landowners, Hodges clarified that estate planning can be complicated and varies from family to family, so he highly recommends talking to a legal specialist. "Succession starts tomorrow, and it can be incremental. It can be small steps."


RELATED: The American Farm Bureau gives three ways a farmer can reduce or avoid the estate tax.


Hodges said there are many ways to plan ahead. One good strategy, he believes, revolves around the “use it or lose it” principle: the Intentionally Defective Grantor Trust (IDGT), which allows you to freeze asset values by gifting or selling them. 


He joked, "I don't know how many times I've heard people say, 'So, you're giving me a defective trust?’"


The strategy of IDGT is valuable: try and have a trust that is excluded from your taxable estate but included for your income tax purposes. Hodges elaborated, "So, if you think about a Venn Diagram, you're trying to hit this sweet spot where it overlaps.”


The grantor sets up an irrevocable trust for kids or grandkids, which ultimately, may allow some asset sales to this trust while not having the seller recognize capital gain. 


“If you think about it, let's say you have $12 million you're ready to gift, the rest of your statement is $10 million. Your liability keeps going up as the $10 million appreciates."


Hodges pointed again to the purpose of IDGT, “To freeze assets. But also it allows that grantor, the person who made the trust, to pay income tax on the property in the trust."


This reduces the grantor's unified credit by fair market value or assets. They then can gift or sell to the trust items projected to appreciate while also creating a promissory note to the grantor to pay down over their life.


RELATED: Public accounting firm Crowe LLP reviews a 2023 IDGT ruling from the IRS that found assets not included in the grantor’s gross estate receive no basis step-up. Read it here. 


"You are having the older generation pay tax for the younger generation.” But here’s where it is counter-intuitive, Hodges said, “That's not a gift, and that's the interesting part of it. It's not a gift because of the income tax consequences.


“I'm paying taxes on something I'm getting taxed on. So, then the assets in that grantor trust can rise without the drag of income tax liability. And if you're the grantor, you get to pay the tax that also reduces your taxable state."


This may not be feasible for everyone, but Hodges wants to raise awareness for families planning ahead. He thinks this can be a good option for farmers wanting to ensure their land passes safely to the next generation.


Note: Robert Hodges was a guest speaker at the 18th Annual Land Investment Expo in Des Moines, Iowa. For discounted tickets for the 2026 Expo, click here.  

American Farmland Owner Hayfields mountains

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