University of Nebraska Extension - Holt/Boyd News Column for the Week of August 18, 2024

Estate Planning: Stepped-Up Tax Basis

A key consideration in estate planning is the transfer of assets to the next generation as 98% of farms are family owned and operated. Additionally, active operators or retired farmers own 75% of U.S. farmland (AgAmerica, 2023). As the average age of an operator increases, there is going to be a large transfer of farmland and other assets in the future whether by gifting, selling, or passing the farm to the next generation through inheritance.

Stepped-up basis is a tax provision that allows the value of an inherited asset to be adjusted to its fair market value at the time of the original owner's death. This adjustment increases the asset's basis, which is the value used to determine capital gains or losses when the asset is eventually sold by the heir. By stepping up the basis to the asset's current market value, any appreciation that occurred during the original owner's lifetime is not subject to capital gains tax, potentially reducing the tax liability significantly for the heir upon the sale of the asset. Although long-term capital gains are taxed at a lower rate relative to other types of income, the rapid appreciation of agricultural assets over someone’s lifetime make them a concern for people looking to sell assets in retirement or people inheriting farm or ranch assets.

This provision is particularly relevant for assets such as real estate and other capital asset investments such as stocks, mutual funds and bonds that may have appreciated in value over time.

The tax basis of land is determined by the amount originally paid for it — or its value at the time it was inherited — plus any improvements made to the property by the current owner, minus any depreciation on improvements.

Example
Say that father, Bob, bought land in the 1970s for $500/acre. Bob made no improvements on the land therefore no depreciation expense is available since land is a non-depreciable asset. Improvements made on bare land such as fences, terraces, and buildings can be depreciated. If Bob were to sell the unimproved land today at a sale price of $7,000/acre, then Bob would be subject to a capital gain of $6,500 per acre and taxed accordingly.

However, if Bob does not sell the land during his lifetime and his child inherits the farm, the beneficiary would inherit the land at fair market value ($7,000 per acre) on Bob’s date of death. The basis is then stepped-up from the $500 that Bob paid for it to $7,000 per acre.

If Bob’s child or heirs chose to sell the land after inheriting it, they would be taxed on the portion of the sale amount above $7,000 per acre. If the inherited property is sold for less than the $7,000 per acre (their stepped-up basis), they could claim a capital loss on their tax return if the property is sold in an arm’s length transaction. To receive the more favorable long-term capital gains tax rate, the heirs must own the asset for more than one year.

Death of First Spouse
When married couples own property as joint tenants, after the death of the first spouse, the surviving spouse would receive a stepped-up basis on 50% of the assets.

What assets qualify?
Current law not only supports the stepped-up basis for grain, livestock, machinery and land, but also for prepaid assets on hand. At someone’s death, it may be important to begin collecting price data on these items. Sometimes, it is difficult to find this information months (or years) after the fact.

I inherited land (or other assets in the past), and now want to sell. Where do I find the basis?
On inherited property or assets, the fair market value of the property should be documented as of the date of inheritance. Having an appraisal done at the time real estate property is inherited establishes the new or stepped-up basis. For other investment assets, keeping documents, and published market data would assist in establishing a current market value. If a taxpayer cannot prove the basis, the IRS has the right to say it was zero.

For land, if there is no documentation of value at time of inheritance, a reasonable estimation using records such as USDA-NASS Census and Survey land values or other credible sources can be used, although not preferred.

Nebraska is one of the six states that has an inheritance tax. When Nebraskans inherit land or other property, they must pay inheritance taxes to the county where the property is located. The value of assets needs to be equal to what was put on the inheritance tax return.

Conclusion
A stepped-up basis can be seen as an ideal opportunity to sell long-held farmland or other assets that have appreciated in value, with minimal to no capital gains tax consequences if the next generation or heirs choose to sell all of part of the inherited property soon after the stepped-up basis is established. The impact of a stepped-up basis on each farmer or rancher depends on specific circumstances. Utilizing an estate planning team that includes professionals such as an attorney, accountant, and financial and/or insurance advisors can help when developing an estate strategy.

For additional articles regarding estate planning visit: https://cap.unl.edu/succession

Source: Anastasia Meyer – Agricultural Economist and Extension Instructor (Center for Agricultural Profitability – Aug 1, 2024)

Corn Rootworm Beetles on Flowers in the Fall

Description of rootworms
The northern and western corn rootworms are well-known insect pests of continuous corn grown in Iowa. Rootworms are beetle larvae that spend the spring and early summer in the soil eating roots of corn plants. Heavy populations of rootworm larvae are capable of severely stunting the growth of corn.

Life cycle rootworms
In mid-summer the rootworm larvae transform to adult beetles that are approximately one-quarter inch long and slender. Northern corn rootworm beetles are uniformly pale green and western corn rootworm beetles are yellow with black stripes. The beetles remain in the corn fields and lay eggs in the soil until mid to late August at which time they begin to wander.

Damage caused by rootworms
Corn rootworm beetles wandering away from corn fields are frequently a late-summer pest in gardens where they feed on flowers and vegetables. They may become numerous on a wide variety of plants but seem most attracted to light colored flowers such as dahlias, roses, and others. Even small numbers of beetles can ruin flowers by feeding on the moist buds or petals. Rootworm beetles are also common in melon and pumpkin patches where they feed on fruit rinds.

Management of rootworms
There are no completely effective control methods for rootworm beetles on flowers in late summer. Insecticides sprays are not allowed as insecticides applied to blooms will kill bees and other beneficial, pollinating insects. Screening highly-prized blossoms with cheese-cloth, nylon netting or other light fabric is one way to avoid attack but may not always be practical. Ultimately the number of beetles dwindles by late summer and they disappear completely with frost. Learning to tolerate a little damage is probably the most practical response.

Source: Iowa State University Yard and Garden (August 19, 2024)

Haying and Cattle Grazing Areas with Hemlock

This year, conditions in Nebraska have been favorable for hemlock. There are two different species of hemlocks in Nebraska that can be toxic to both livestock and people. Here is some information that is important for you to consider as you plan grazing or haying in areas with either of these two species of hemlock.

Two hemlock species are present in Nebraska: poison hemlock (Conium maculatum L.) and spotted water hemlock (Cicuta maculate L.). Poison hemlock is an introduced biennial that tends to grow on higher ground and has leaves like a carrot (fern-like). In early August, poison hemlock has completed its growth cycle as it is mostly seeded out and dead. Water hemlock is a native perennial that prefers to grow in wet areas like ditches and sub-irrigated meadows. Water hemlock has serrated leaves (like a steak knife). Both of these species can be highly toxic to both livestock and to people. Because the level of toxins is variable between individual plants, one plant may contain enough toxins to kill several animals, while another plant in the same field may be virtually risk free when consumed. Unfortunately, there is no visible way to detect which plants are highly toxic or safe.

Poison hemlock contains a group of toxins (piperidine alkaloids) whereas water hemlock has a single, highly potent toxin called cicutoxin. Cicutoxin is one of the most potent plant toxins known. After ingestion, both plants will cause nervousness, excessive salivation, frequent urination and defecation, dilated pupils, and rapid heartbeat. Intoxication with poison hemlock eventually results in respiratory paralysis, causing affected animals to become comatose and die because of suffocation. Water hemlock poisoning cause massive seizures that damages the brain of intoxicated animals resulting in death. While both poisonings progress rapidly, animals can die within 15 minutes of ingesting a fatal dose of water hemlock and within 3 hours of ingesting a fatal dose of poison hemlock. Due to the rapid progression, clinical signs are not often seen and animals are just found dead.

The greatest risk to livestock from poison hemlock is likely small exposures over time. The toxic alkaloids are similar to the alkaloids in lupine that cause crooked calf disease. The alkaloids in poison hemlock have been demonstrated to cause birth defects in feeding trials if consumed between days 40-100 of gestation in cattle.

The fatal toxic dose of water hemlock can be as small as 3.5 oz (100 grams) of green leaves, stems, immature seed heads, or tubers. The fatal toxic dose of poison hemlock is slightly higher, but still requires less than a pound to cause death in mature cattle. Both kinds of hemlock are not considered highly palatable to livestock and are typically avoided. Notable exceptions to this are in overgrazed pastures with limited forage and in stored forages that are fed later, especially if the forage is processed to limit sorting. Pastures or meadows containing hemlock that are hayed will make avoiding hemlock more difficult for animals, especially if the hay has been processed or ground. A published case of water hemlock poisoning described tubers being trampled in shallow water followed by cattle drinking the water and dying.

Controlling poison hemlock can be done by either physical or chemical methods. Physical removal of plants can be effective is steady effort is applied over time. Personal protective equipment (PPE) should be used, as hemlock is also poisonous for humans through skin contact or ingestion. For larger infestations, try chemical control using a broadleaf herbicide.  2,4-D plus Dicamba is an example, spraying in the spring and fall. Water hemlock can also be controlled through similar physical and chemical methods. It is worthwhile to note that some herbicide use can make toxic plants more palatable to animals. Since water hemlock grows near water sources, herbicides will need to be labeled for use in water areas and should be done with caution. Read the herbicide label. If physical removal is used, do not burn the hemlock plants. The smoke from burning poison hemlock can be highly toxic to humans if inhaled.

If you have grazing land that contains hemlock of either kind, strongly consider eradicating these plants, or fencing livestock out of patches until the hemlock can be killed and removed. Avoid incorporating hemlock into hay bales. If you suspect that hemlock may be incorporated into hay you plan to feed, strongly consider feeding it unprocessed and in sufficient quantity to allow livestock to sort out the less palatable hemlock. However, animals may still be at risk for poisoning, if the hemlock is consumed by the animal.

There are several resources to help you identify poison or water hemlock, as there are other benign plants that look similar. “Nebraska Plants Toxic to Livestock (EC3037)” provides pictures and information about both hemlocks.

Source: Brian Vander Ley - DVM Epidemiologist, Great Plains Veterinary Education Center; Bethany Johnston - Nebraska Extension Educator; Scott Fritz - DVM, Kansas State University Clinical Assistant Professor of Toxicology (BeefWatch – August 16, 2024)