As 2024 winds down (as I write this, it’s after 6:00 p.m. central time), my thoughts turn to some common themes that don’t hurt to discuss.
The first thing is some tax planning reminders as we transition into a new year. 2025 is currently set to be the last year of the Trump tax cuts—and if they aren’t extended or made permanent, then nearly all taxpayers will see a significant tax increase starting in 2026. It will be interesting to see what Congress does. Also on my mind are options for handling long-term care costs, powers of attorney, and the portability of a pre-deceased spouse’s unused exclusion amount.
Year-End Tax Planning
Before you turn the calendar to 2025, take a few moments to think through a few important tax planning matters for your farm or ranch.
What are some tax items to think about before 2024 ends? Many farmers pre-pay expenses. To obtain a valid prepaid expense, you must request a certain quantity of a product. If a supplier can’t provide that quantity, it isn’t a valid prepaid expense for the year. You can’t simply go to the co-op and put down a deposit.
Also, remember that if you received Emergency Relief Program Payments this year, they can’t be deferred to 2025. The payments are for damage that occurred in prior years, so they have already been deferred.
If you sold more livestock than usual in 2024 due to weather-related conditions, consider deferring the income. There are two possible deferability approaches. One is a straight-up deferability provision, and the other uses the involuntary conversion rules.
If you bought equipment late in 2024, consider whether it’s better to use bonus depreciation, expense method depreciation, or both. The rules are different for each provision, so be careful. As a general rule, if you financed the purchase, you would probably want to elect out of bonus depreciation so you can match up the yearly depreciation amounts with your loan payments.
And if you reside in Iowa, make sure you don’t expire before 2024 does—dying in Iowa will be cheaper in 2025.
Handling Long-Term Care Costs
Planning for long-term care costs should be an element of a complete estate plan for many farm and ranch families. Indeed, the very first law review article I published over 30 years ago was on this topic. One way to address long-term care costs involves long-term care insurance. That makes it important to consider the terms and conditions when exploring long-term care policies.
What are some things to examine when exploring long-term care insurance? One is the duration of benefits. Policies cover from one to five years. Also, what triggers payment under the policy? There will be terms and conditions attached to those triggers. Make sure you understand them
Long-term care policies also have a waiting period that can be anywhere from a few days to a year. The longer the waiting period for benefits to payout, the lower the policy premiums. Also, consider the daily benefit amount. Will the policy pay all of the daily long-term care costs or only a percentage? Perhaps the policy can be tailored to pay only the portion of costs that income doesn’t
Also, ensure the policy has an inflation adjustment provision and that you understand the type of inflation adjuster.
If a policy can be obtained to cover at least the deficiency that income doesn’t cover, all of the family’s assets will be protected. That means you may not have to gift assets to protect them.
Many insurance agents and financial advisors can provide estimates for policies and help you determine the type of policy that might be best for you.
Powers of Attorney
When doing estate planning, do not overlook the power of attorney documents. These documents designate who may act on your behalf in making financial and healthcare decisions if you aren’t able to. Powers are very important, especially for farmers and ranchers.
There are generally two types of powers of attorney – financial and healthcare. A financial power may be either a durable or a “springing” power. A durable power authorizes your agent to act on your behalf as soon as the document is executed – it endures your subsequent incompetency. A springing power only authorizes your agent to act once you have been declared incompetent.
Also, make sure you give thought to the powers that you want your agent to have. Maybe limiting the agent’s authority to dealing with non-farm assets would be a good approach. You could also have multiple agents and give one the power to handle farm assets and another the power to deal with non-farm assets.
Without financial power, a guardian may have to be appointed.
A health care power designates someone else or perhaps your family members collectively to make medical decisions according to your desires as expressed in the power in the event you aren’t able to.
Both types of powers are a critical part of your estate plan. They both can help avoid management and transition issues for your farming or ranching operation. If you are going to create an estate plan or update an existing one in 2025, make sure not to forget to make powers of attorney part of your estate plan.
Portability of the DSUEA
In 2025, a decedent’s estate is exempt from federal estate tax up to $13.99 million. Very few estates are of that size, leaving an unused exemption amount behind. But, since 2011, upon the death of the first spouse of a married couple, any unused amount can be transferred to the surviving spouse by filing a federal estate tax return in the deceased spouse’s estate and electing to transfer the unused amount to the surviving spouse.
When the first spouse of a married couple dies, if the taxable estate is less than $13.99 million (in 2025), any unused amount of the exclusion that offsets estate tax can, by election, be added to the surviving spouse’s exemption. That’s important because the exemption from estate tax is presently set to fall to $5 million (adjusted for inflation) beginning in 2026. So, having that extra exemption amount could save tax. The election is made by filing Form 706 and following the requirements.
The rule has been that an election to transfer the unused exemption amount to the surviving spouse must be made within two years of the first spouse’s death. But a couple of years ago, the IRS extended the timeframe for making the election to five years from the date of death of the first spouse. That’s good news for many, including farmers and ranchers.
Thanks for reading the blog during 2024. As some have noted, the detailed tax legal writings have switched primarily to my Substack. For those of you who subscribe to my Substack, thank you. See you in 2025.
