Sticking it to the Man has long been a mantra of the American youth. For years we’ve been saying this, its a chant that I heard my peers both Liberal and Conservative throughout my college years. Some times the proverbial Man is the government, other times it is those wealthy elites that we don’t seem to like. Always there is a level of malice between the chanter and the so-called Man!
I write this today because our chants of stick it to the man, and its many variants are about to take their toll in a very big way, one that will hurt families and economic development in a big way. I’m talking about losing Stepped-Up Basis, and it is one of those attacks on the very basis of the American Dream.
The current Administration wishes to push forward The American Families Plan, and while the plan is noble in its efforts for the American Families it gets wrong the benefits of Stepped-Up Basis. Some politicians will argue that this is hardly going to impact most Americans but that is overlooking Real-Estate, Investment Funds, Family Businesses, and countless other examples. While the plan claims that it won’t impact people inheriting less than $1 million in assets that is hardly a comfort for a very large portion of the country.
To understand the damages I’ll start you on the example of a Minnesota family. Minnesotans come in many flavors, though my personal favorite flavor is what we call “Lake People”. These are the people who may live and work in the Twin Cities, but they have a family lake place that their parents or grandparents built. Perhaps they themselves are just starting off on the lake country life and have bought a lake home as a place to vacation with their family.
For simplicity lets say this lake place was purchased and built by the grandparents in the mid 1960s. This property cost $10,000 at the time as an initial investment. Over the years work has been placed into the place and it has increased in value as well as the price of land has increased. Over the years the family realized this property needs to be protected to keep it in the family. The grandparents restructure the property as a partnership giving each of their children a share of the property. Now their shares slowly build until they each own a proportionate share.
Unfortunately though one of the children passes away leaving their shares to their own children. The total value of the shares when the parent received them may average out that it was worth only $50,000 at the time. Today however the total value of the property is in excess of $2.5 million. The way stepped up basis works is that the inheritor would receive that share which was already taxed and collected on the grandparent and then depending on the partnership structure taxed on the parents as well, so when it is inherited the grandchild in this case receives the shares at the $2.5 million evaluation and would only be taxed if they sold it at a price in excess of this value. The American Families Plan would do away with this stepping up protection to the grandchild. Effectively the Grandchild would be paying taxes either on the Capital gain of $2,490,000 from the hard work of grandma and grandpa and parents, or the $2,450,000 if the parents had paid taxes provided things were covered correctly for the parents. Either way a very hefty tax to pay and one that would rightly place the family in extreme hardship.
Ok so my idea is perhaps a bit contrived for most of America. I realize most of my readers have no idea what “Lake People” people are like, nor what family lake places are like and their increased value over time. So how about instead we look at the family farm.
There is nothing more iconic than the American Farmer. This nation was settled by farmers. They grow our food, they truly keep America alive. While we see many large corporate farms across the country there are still plenty of good old fashioned family farms. According to USDA ERS – Farmland Value the median price per acre of farm land is $4,100 per Acre while the Average (sorry no data on the median for Apples to Apples) was 444 Acres according to Farms and Land in Farms 2019 Summary 02/20/2020 (usda.gov). I’m sure I can find a better chart that covers all the years between 1995 and present in farmland values, but this chart near the bottom of the Farmland value link above sb738ab.xls (live.com) Provides pretty a pretty good breakdown of land prices going back all the way to 1950.
So why don’t we start with the current average family farm size of 444 Acres, at a value of $4,100 per Acre the farmland alone is now worth $1,820,400.00 today. It is reasonable to say that the farm was purchased in the 60s, looking at Nebraska now we see that $89 the same farm cost Grandma and Grandpa a grand total of $39,516. So the stepped up basis here is huge. Dropping it creates a tax burden of $1,780,884 that the inheritor is taxed on. At 39.6% tax that means the inheritor will owe $705,230.06 in taxes. This is evaluating just the farmland. Presumably there is a barn and a farmhouse on the property as well as equipment, and livestock we haven’t accounted for yet.
Unfortunately the median farm in the US only actually generates about $10,000 in profits per year requiring lots of off farm labor to make up the rest of their income. This means that the new farmer would see no profit for over 70 years of farm work, or that they will be forced to sell the farm to cover the tax burden.
Ok so still you are thinking to yourself that can’t be that many people can it? Well its actually a decent amount 2.2 million family farms are in the United States. While it seems small compared to the 333,000 citizens in our country it still is a very large number. Far larger in fact than the population that had a documented adverse reaction to the Covid vaccine.
But say you still don’t like the farm idea. How about instead we take a look at real estate. First I would like to point out that this is entirely all we have been looking at, real estate. Minnesota Lake Cabins are Real Estate, Farms are Real Estate, Homes too are real estate. Now take a look at a home in Orange County California, where the median list price is $1.1 million. Again here we are looking at a situation where family members will be forced into selling grandma’s house just to cover the tax debt.
This can be applied to nearly every home in America. If your family runs a small business you can bet those assets have a value over $1 million. You can absolutely guarantee that like with the farm you will lever be able to make a profit and you will be forced into shuttering the doors of a family business. This isn’t big business we are talking about, we are talking about the little guy. The lifeblood of the American economy, the small construction firms you might hire to put up a back deck, roof your home, a local mechanic… You don’t realize this but many of these assets easily are worth more than $1 million. If you kill stepped up basis you will hurt the American Family, you will hurt the American Economy, and you ultimately will be hurting yourself and your grand children.
