Recent Blog Posts
Featured Discussion on the Downward Trend in Global Profitability of Crop Farming and a Bearish Outlook for 2024
During its annual conference from June 10th to 14th, the agri benchmark Cash Crop Network discussed recent developments in global crop production. I was fortunate to recently attend the agri benchmark conference in Valladolid, Spain. The conference was hosted by the Spanish Ministry of Agriculture who together with its operating company Tragsa, established and manages a network of 37 typical crop farms. Approximately 55 international experts from all over the world discussed recent results and topical issues of global crop production.
The Ohio State University College of Food, Agricultural and Environmental Sciences is a member of the agri benchmark network and I serve as the network representative for the College. The following are a few selected highlights from the conference.
Last year (2023) was difficult for most typical agri benchmark farms when compared with previous, more profitable, years. Increasing machinery cost and lower output prices many farms experienced a massive downturn in return to land.
The projections for 2024 for the agri benchmark network, which is coordinated by the German Thünen Institute, are even more bearish. The likely relief provided by lower fertilizer prices will not fully compensate for the increase in machinery costs. In addition, based on global price projections, farm-gate production prices are likely to be lower in 2024 than in 2023. Many typical farms are likely to struggle with returns in 2024.
US renewable diesel boom – how US soybean production may increase
A number of U.S. states have implemented blending targets for renewable fuels. As a result, renewable diesel production has increased substantially. By 2029 this will lead to an annual demand of 8 million tons of soybean oil renewable diesel production (FAPRI-MU, 2024), a 3-million-ton increase in demand relative to 2020. The respective supply can be generated through more domestic crushing or an increase of soybean acreage; most likely, a combination of both options will be used. To satisfy this increased demand for soybean oil via expansion of soybean acreage, about 5.1 million ha (+15% of current soybean acreage) of additional farmland would be required. An increase in soybean acreage may come from either (a) shifting away from continuous corn rotations to corn-soy and (b) shifting corn-soy rotations toward corn-soy-soy. Based on agri benchmark data, Margaret Lippsmeyer from Purdue University showed that option (a) would require an increase in soybean prices of 6% and option (b) of 8% to make these rotations preferable over existing ones.
Ukraine grain exports: No specific effects on Central & Eastern European farm-gate prices
At the national level, agri benchmark farm-gate data did not yield an indication that growers in Central and Eastern Europe have been suffering from the inflow of Ukrainian grain. As the graph attached indicates, respective wheat margins between Western Europe and Central and Eastern Europe actually narrowed. However, agri benchmark partners mentioned that in regions close to the Ukrainian border lower than usual prices have been observed.
EU sugar production: Expanding and rather profitable in 2023
Due to high EU sugar prices in 2022, EU production increased by 7% in 2023. Therefore, the EU became a net exporter again. Since global sugar prices were still rather high, the negative impact on domestic prices was low. Thomas de Witte from Thünen Institute stated that profitability of sugar beet production was extraordinarily high – an advantage of 1.000 to even 2.000 €/ha over other crops could be observed. A possible future cut of 15 to 30 €/t in beet prices (or 20% to 40%) would still make beets competitive at wheat prices of 230 €/t.
Regenerative agriculture – a promising option to reduce environmental footprint?
The members of the agri benchmark Network discussed the concept and the environmental claims of regenerative agriculture. Many industry leaders and politicians are promoting this idea to address public concerns regarding agriculture; influential global consulting companies try to educate growers regarding the profitability of suggested measures such as cover crops and no-till. One discussion focused on the notion that proponents of regenerative agriculture oversell the potentials, in particular regarding greenhouse gas savings and economics. Furthermore, the two major sources for GHG emissions – nitrogen use and land use change – are not addressed. Considering these shortcomings, the network will be publishing a thesis paper on this topic and will suggest more meaningful indicators to define goals that effectively reduce GHG emissions and reduce pressure on biodiversity.
agri benchmark, a nonprofit, politically independent organization, provides comprehensive information and advice on crop production systems. With its proven and unique farm level data and a global network of on-the-ground experts, agri benchmark enables economic and environmentally sustainable decision-making by agricultural stakeholders worldwide.
Let’s grow together – Your strategic partner for tomorrow’s agriculture
For more information visit: agribenchmark.org
Evolution of average return to land* across all crops (USD/ha)
* Total revenue (incl. decoupled payments) minus total cost (excluding land cost);
weighted average per farm, simple average across all farms per region
Evolution of farm-gate wheat prices – regional agri benchmark averages (USD/t)
Source: agri benchmark Cash Crop (2024)
Group picture from the conference
Source: agri benchmark Cash Crop (2024)
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The Internal Revenue Service (IRS) has specific guidelines for determining whether a farming activity is considered a business or a hobby. This distinction is crucial because it affects how expenses and losses are treated for tax purposes. Farmers who engage in agricultural activities must understand these guidelines to ensure they comply with tax laws and maximize their deductions.
Defining Hobby Farms vs. Business Farms
The IRS considers several factors to determine if a farming operation is a for-profit business or merely a hobby. A farm classified as a hobby cannot deduct losses against other income, whereas a business farm can. The primary difference lies in the intent to make a profit.
The 3-out-of-5-Years Rule
One of the key benchmarks used by the IRS is the "3-out-of-5-years" rule. According to this rule, a farming activity is presumed to be for-profit if it has made a profit in at least three of the last five tax years. For horse breeding, training, showing, or racing, this period extends to two out of seven years. If the farm meets this criterion, the IRS assumes the activity is profit-oriented unless there is evidence to the contrary.
Factors Considered by the IRS
Even if a farm does not meet the 3-out-of-5-years rule, it can still be considered a business based on other factors. The IRS evaluates the following criteria to assess the profit motive:
- Manner of Operation: Is the farm run in a businesslike manner? This includes maintaining accurate books and records, having a separate bank account, and implementing strategies to improve profitability.
- Expertise: Does the taxpayer have expertise or consult with experts to make the farming operation profitable? This factor looks at the knowledge and experience of the farmer or their reliance on professional advice.
- Time and Effort: How much time and effort does the taxpayer put into the farming activity? Significant personal involvement can indicate a profit motive.
- Asset Appreciation: Does the value of the farming assets (such as land and equipment) increase over time? Appreciation can suggest a profit intent, even if the farm incurs losses.
- History of Income or Losses: What is the history of income and losses in the farming activity? Occasional profits or a trend towards profitability can support the profit motive.
- Financial Status: Does the taxpayer have substantial income from other sources? If the taxpayer relies on farming as their primary income, it is more likely to be seen as a business.
- Elements of Personal Pleasure: Does the taxpayer derive personal pleasure or recreation from the farming activity? While enjoyment does not automatically classify an activity as a hobby, it can be a contributing factor.
Tax Deductions and Hobby Farms
If the IRS deems a farm a hobby, the taxpayer can only deduct expenses up to the amount of income generated by the hobby. This means that hobby farms cannot use losses to offset other income. Conversely, a business farm can deduct all ordinary and necessary expenses related to the farming activity, even if they exceed income, potentially reducing overall taxable income.
Record Keeping and Documentation
Maintaining meticulous records is essential for farmers to substantiate their profit motive. This includes keeping receipts, invoices, and detailed logs of farming activities. Proper documentation helps demonstrate the businesslike operation of the farm and supports the claim of profitability.
Conclusion
Understanding how the IRS views hobby farms versus business farms is critical for farmers to manage their tax obligations effectively. The 3-out-of-5-years rule provides a clear benchmark, but other factors also play a significant role in determining the nature of the farming activity. By operating in a businesslike manner and keeping thorough records, farmers can maximize their tax deductions and ensure compliance with IRS regulations.
The Occupational Safety and Health Administration (OSHA) couldn’t have timed the weather for its proposal for a federal rule to reduce heat injury and illness better—in the midst of July heat waves across the U.S. But timing isn’t everything and certainly isn’t a guarantee that the proposal will become a final, effective rule. The proposal already faces opposition from many Republicans and employers who would be subject to the proposed standards.
OSHA’s proposed rule on “Heat Injury and Illness Prevention in Outdoor and Indoor Work Settings” would establish a federal heat standard to protect employees in indoor and outdoor working conditions. OSHA states that there was an average of 40 heat-related fatalities per year across the U.S. from 2011-2022 and an average of 3,389 work-related heat injuries and illnesses per year in that same period. The agency believes that those numbers are likely significantly underestimated.
The proposed rule would apply to “all employers conducting outdoor and indoor work in all general industry, construction, maritime, and agriculture sectors where OSHA has jurisdiction.” OSHA does not have jurisdiction over agricultural employers with 10 or fewer employees, so smaller-scale farms and agribusinesses would be exempt from the rule. Generally, employers subject to the rule would have to assess their working conditions and develop and implement a “heat injury and illness prevention plan” that assesses and manages heat hazards in their workplaces.
Specifically, the proposed standard would require employers to:
- Identify heat hazards in outdoor and indoor work sites;
- For outdoor work sites, employers would have to monitor the heat at the site by tracking local heat index forecasts or measuring the heat index and temperature;
- For indoor work sites, employers would have to identify work areas with the potential for hazardous heat exposure and implement a monitoring plan
- Implement control measures at or above an Initial Heat Trigger (heat index of 80°F) that includes providing employees with effective two-way communication, cool drinking water, break areas with cooling measures, indoor work area controls, acclimatization protocols for new and returning unacclimatized employees, and paid rest breaks if needed to prevent overheating.
- Implement additional control measures at the High Heat Trigger level (heat index of 90°F) that include providing employees with a hazard alert and mandatory rest breaks of 15 minutes every two hours and observing employees for signs and symptoms of heat-related illness.
- Provide training, have procedures to respond if a worker is experiencing signs and symptoms of a heat-related illness, and take immediate action to help a worker experiencing signs and symptoms of a heat emergency.
OSHA’s announcement on the Heat Injury and Illness Prevention rule is on the agency’s website at https://www.osha.gov/heat-exposure/rulemaking. Comments to the proposal can begin after the official proposed rule is published in the Federal Register, which should be soon. To understand the rulemaking process and how to submit comments on a proposed rule, visit this OSHA site.
Tags: OSHA, employment law, heat injury, heat illness, hiipp, employment, labor
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Join us for another "Planning for the Future of Your Farm" workshop on August 22, 2024 from 9:00 am to 4:00 pm in northeast Ohio. This popular workshop aims to help farm families have difficult conversations and learn strategies and tools to transfer farm ownership, management, and assets to the next generation. Extension Farm Management Field Specialist David Marrison will join Robert Moore of the OSU Agricultural & Resource Law Program to present the workshop.
Workshop topics include: Developing Goals for Estate and Succession; Planning for the Transition of Control; Planning for the Unexpected; Communication and Conflict Management; Legal Tools and Strategies; Developing Your Team; Getting Your Affairs in Order; and Selecting an Attorney.
The registration fee is $25 per person and includes lunch, refreshments, and course materials. Registration deadline is August 16, 2024. This program is made possible at a discounted rate due to the generous support from the Hertzer Family Trust.
Extension Educator Lee Beers at the Trumbull County Extension office is the local host for the workshop. Contact Lee with questions at 330-638-6738 or via email at beers.66@osu.edu. For more information about the workshop, visit go.osu.edu/farmsuccession.
Tags: planning for the future, Estate Planning, transition planning
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Ohio’s Wild, Scenic, and Recreational Rivers Program will soon see some changes under Senate Bill 156, recently passed by the Ohio General Assembly. The legislature forwarded those changes to the governor on July 16. Governor DeWine is expected to sign the bill, which had unusually high non-partisan support with only one legislator voting against the measure.
The legislature’s focus on the Wild, Scenic, and Recreational Rivers Program began with concerns from owners of private land that abuts watercourses designated under the program as wild, scenic, or recreational. Ohio currently has 15 designated watercourses comprising 27 stream segments and just over 830 river miles. Many of the designated watercourses are along agricultural lands.
Those landowner concerns initiated a program review and led to the revisions enacted by the legislature in S.B. 156, which makes the following changes.
- Transfers the authority to administer the program from the Division of Parks and Watercraft to the Division of Natural Areas and Preserves (DNAP) in the Ohio Department of Natural Resources (ODNR).
- Narrows DNAP’s scope of authority to the watercourses that are designated as wild, scenic, and recreational rivers, rather than to wild, scenic, and recreational river “areas” as under the current law.
- States that a watercourse designation does not affect private property rights or authorize the Director of Natural Resources, DNAP Chief, or any governmental agency or political subdivision to restrict the use of private land adjacent to a designated river.
- States that the law does not give any right to the above parties to enter upon private land.
- Expands the types of watercourses subject to designation as a wild, scenic, or recreational river to include the headwaters of those rivers.
- Requires DNAP to perform certain duties regarding publicly owned land along a designated river, including both of the following:
- To adopt rules governing the use, visitation, and protection of scenic river lands and other specified publicly owned lands administered by DNAP within the watersheds of wild, scenic, and recreational rivers; and
- To establish facilities and improvements within the system of wild, scenic, and recreational rivers, scenic river lands, and other specified publicly owned lands that are necessary for their visitation, use, restoration, and protection and that do not impair their natural character.
- Requires the DNAP Chief to adopt rules establishing fees and charges for the use of facilities in nature preserves, scenic river lands, and on publicly owned lands.
- Clarifies that certain public entities must obtain approval from the ODNR Director if specified construction activities are performed within 1,000 feet of a wild, scenic, or recreational river.
- Requires the ODNR Director to post the intention to declare a watercourse as a wild, scenic, or recreational river on DNAP’s website.
- Allows the DNAP Chief to accept, receive, and expend gifts, devises, or bequests of money, land, or other properties for purposes of the wild, scenic, and recreational river program.
Learn more about S.B. 156 on the Ohio legislature’s website. Information on Ohio’s Scenic Rivers Program is on ODNR’s website.
Tags: water law, scenic rivers, ODNR, Property Rights
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As the 2026 deadline for the significant reduction in the federal estate tax exemption approaches, high net worth individuals and estate planning professionals are seeking effective strategies to mitigate potential tax burdens. One possible strategy is the Spousal Lifetime Access Trust (SLAT), a tool that can offer substantial tax advantages while providing financial security for spouses. Our latest bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans", delves into SLATs, offering an explanation of their benefits, mechanisms, and considerations.
Understanding SLATs
A SLAT is an irrevocable trust designed to provide income to a beneficiary spouse while removing the principal assets from the donor spouse’s taxable estate. This strategy can significantly reduce estate taxes and ensure financial stability for the beneficiary spouse during their lifetime. The following are some of the key components and characteristics of SLATs:
- Irrevocability: Once assets are transferred into a SLAT, the trust cannot be modified or revoked, and the assets cannot be returned to the donor spouse. This permanence is crucial for excluding the assets from the donor spouse's taxable estate.
- Trustee Management: A trustee, who can be the beneficiary spouse, another individual, or multiple co-trustees, manages the SLAT’s assets. The trustee’s role is to ensure that the assets are used according to the trust’s terms and in the best interests of the beneficiary spouse.
- Beneficiary Distributions: The beneficiary spouse receives income from the trust during their lifetime, providing ongoing financial support. Upon the beneficiary spouse’s death, the remaining trust assets are distributed to designated beneficiaries, such as the couple’s children, free of estate taxes.
Estate Tax Advantages of SLATs
SLATs offer two primary mechanisms for reducing estate taxes:
- Exclusion from Taxable Estates: Assets transferred to a SLAT are excluded from both the donor and beneficiary spouses’ taxable estates. This means that any future appreciation of these assets is not subject to estate taxes.
- Pre-Exemption Reduction Transfers: By transferring assets to a SLAT before the federal estate tax exemption is reduced, individuals can lock in the current higher exemption amount. Any value exceeding the new, lower exemption amount set for 2026 is not "clawed back" into the estate, providing significant tax benefits.
Practical Considerations
While SLATs offer substantial benefits, their effectiveness depends on careful planning and consideration of several factors:
- Appreciation of Transferred Assets: The strategy is most beneficial when the transferred assets are expected to appreciate in value, as the growth occurs outside the taxable estates.
- Exceeding the Exemption Amount: SLATs are particularly advantageous for individuals whose wealth exceeds the new estate tax exemption amount. Large transfers made before the reduction can result in significant tax savings.
Advantages and Disadvantages
Like most estate planning strategies, there are both advantages and disadvantages. The advantages include:
- Exclusion from Estate: Assets transferred into a SLAT are not included in either spouse’s estate, protecting any appreciation in value from estate taxes.
- Lifetime Benefits: The beneficiary spouse can receive income and, in some cases, principal from the trust, providing financial support during their lifetime.
- Asset Protection: SLATs offer a level of protection from creditors, safeguarding the assets from potential claims against either spouse.
Disadvantages to consider are:
- Irrevocable Nature: The donor spouse loses control over the assets once they are transferred into the SLAT, which can be a drawback for individuals who prefer flexibility.
- Dependency on Spousal Relationship: The effectiveness of a SLAT is tied to the stability of the marriage. Divorce or the death of the beneficiary spouse can impact the donor spouse’s ability to benefit indirectly from the trust income.
- No Step-Up in Basis: Heirs do not receive a step-up in tax basis upon inheriting assets from a SLAT, potentially resulting in significant capital gains taxes.
Conclusion
The Spousal Lifetime Access Trust (SLAT) is a valuable estate planning tool that can help reduce estate taxes, especially in anticipation of the potential reduction in the federal estate tax exemption in 2026. While a SLAT is not suitable for everyone, it can be effective in specific situations, particularly for individuals with highly appreciating assets or those who can gift assets near the current federal estate tax exemption limit. Implementing a SLAT requires careful planning and close collaboration with legal and tax advisors. As always, consult with an experienced attorney and tax advisor to ensure that a SLAT aligns with your estate planning goals and complies with all relevant laws and regulations.
For more detailed information and practical insights, see the new bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans" available at farmoffice.osu.edu.
We're building a forum for professionals who meet a critical need: helping farm operations transition to the next generation. The second annual Cultivating Connections Conference is for attorneys, tax professionals, appraisers, financial planners, educators and others who work in farm transition planning. The conference is an opportunity to discuss laws, consider new tools, analyze planning strategies, work through a case study, and meet other professionals. If farm transition planning is what you do, we hope you'll join us for the conference in Cincinnati, Ohio on August 5 and 6. For those who want to attend but can't travel, we also provide a virtual attendance option.
Cultivating Connections Conference highlights include:
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Timely topics. Sessions include preparing for the 2025 tax sunset, utilizing business entity discounts, understanding rural appraisals, drafting prenuptial agreements, divorce impacts on transition planning, implementing the estate plan and estate tax return, communication strategies, organizing client information, and ethical issues in farm transition planning.
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Expert speakers. A faculty of experienced attorneys, accountants, academics, and appraisers will share their knowledge and insights.
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Problem solving. A real-life case study will provide an opportunity for collaborative in-depth analysis of practical farm transition planning techniques, estate planning considerations, and tax implications.
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Relationships. Attendees can meet new peers, share experiences, and build relationships with a network of other farm transition professionals.
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Continuing education credits. We offer Continuing Legal Education credits for Ohio and Iowa, IRS Continuing Education credits, and assistance applying for credits in other states.
The University of Cincinnati College of Law is the site of this year's conference, hosted by the Ohio State University Agricultural and Resource Law Program. Conference co-sponsors are Iowa State University's Center for Agricultural Law and Taxation and the National Agricultural Law Center. The three institutions partnered on the inaugural conference last year, and have since formed the Association of Farm Transition Planners to continue supporting the nation's farm transition planning professionals.
The Cultivating Connections Conference agenda, list of speakers and registration are at https://go.osu.edu/cultivatingconnections. The website also highlights attractions and events for conference attendees, such as the nearby Cincinnati Zoo, Kings Island, the Newport Aquarium, and the Great American Ballpark, where the Cincinnati Reds will host the San Francisco Giants on August 4. Cincinnati is a prime location for those who want to combine farm transition learning with a little summer fun. We hope to see you there!
Tags: farm transition planning, Cultivating Connections, Estate Planning, succession planning
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Ohio Farm Custom Rates 2024
Barry Ward, Eric Richer, John Barker and Amanda Bennett, OSU Extension
Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform tasks is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.
Custom rates increased for the majority of field operations in 2024 as compared to surveyed rates in 2022 but the increases did vary by operation. Examples include an increase of 6% for Planting Corn (30 Inch Rows with Fertilizer Application), 5.6% for Harvesting Corn (Combine, Grain Cart, Haul Local to Farm), 21% for Spraying (Self-Propelled Sprayer, Crop Protection Chemicals) and 24% for Field Cultivator.
New field operations in this year’s survey and summary include drone/UAV application and cover crop seeding.
Ohio Farm Custom Rates
The “Ohio Farm Custom Rates 2024” publication reports custom rates based on a statewide survey of 333 farmers, custom operators, farm managers, and landowners conducted in 2024. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and labor for the operation.
Some custom rates published in this study vary widely, possibly influenced by:
- Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
- Size and shape of fields
- Condition of the crop (for harvesting operations)
- Skill level of labor
- Amount of labor needed in relation to the equipment capabilities
- Cost margin differences for full-time custom operators compared to farmers supplementing current income
Some custom rates reflect discounted rates as the parties involved have family or community relationships. Discounted rates may also occur when the custom work provider is attempting to strengthen a relationship to help secure the custom farmed land in a future purchase, cash rental or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.
Charges may be added if the custom provider considers a job abnormal such as distance from the operator’s base location, difficulty of terrain, amount of product or labor involved with the operation, or other special requirements of the custom work customer.
The data from this survey are intended to show a representative farming industry cost for specified machines and operations in Ohio. As a custom farm work provider, the average rates reported in this publication may not cover your total costs for performing the custom service. As a customer, you may not be able to hire a custom service for the average rate published in this factsheet.
It is recommended that you calculate your own costs carefully before determining the custom rate to charge or pay. It may be helpful to compare the custom rates reported in this fact sheet with machinery costs calculated by economic engineering models available online. The following resources are available to help you calculate and consider the total costs of performing a given machinery operation.
- Farm Machinery Cost Estimates, available by searching University of Minnesota.
- Illinois Farm Management Handbook, available by searching University of Illinois farmdoc.
- Estimating Farm Machinery Costs, available by searching Iowa State University agriculture decision maker and machinery management.
Volatility in diesel price may sometimes cause concern for custom rate providers that seek to cover all or most of the costs associated with custom farm operations. The approximate price of diesel fuel during the survey period (January – April 2024) ranged from $3.20 - $3.50 per gallon for off-road (farm) usage. As a custom farm work provider, if you feel that your rate doesn’t capture your full costs due to fuel price increases you might consider a custom rate increase or fuel surcharge based on the increase in fuel costs.
The complete “Ohio Farm Custom Rates 2024” publication is available online at the Farm Office website:
https://farmoffice.osu.edu/farm-management/custom-rates-and-machinery-costs
The landscape of federal estate taxes is poised for significant change in 2026, with the potential reduction of the federal estate tax exemption on the horizon. Currently, the exemption stands at $13.61 million per person for 2024. However, without congressional intervention to extend or make permanent the current exemption, it is expected to drop to around $7 to $7.5 million, adjusted for inflation, in 2026. This looming reduction brings a sense of urgency for farmers and individuals with substantial estates to consider strategic planning to mitigate future tax liabilities.
The OSU Agricultural & Resource Law Program has released a comprehensive bulletin, “Gifting to Reduce Federal Estate Taxes”. This bulletin delves into the nuances of gifting as a viable strategy to reduce federal estate taxes. It explores various gifting options, their implications, and the potential benefits and drawbacks associated with each approach.
Types of Gifts and Their Implications
The bulletin categorizes gifts into two primary types: annual exclusion gifts and lifetime credit gifts.
- Annual Exclusion Gifts: These are gifts of up to $18,000 per person, per year, to an unlimited number of recipients. This type of gift is not subject to federal gift tax for either the giver (Giftor) or the receiver (Giftee). For example, a grandparent can gift $18,000 to each of their ten grandchildren, amounting to $180,000, without incurring any federal gift tax. This strategy is particularly effective for those slightly over the estate tax exemption threshold, as multiple small gifts can cumulatively reduce the taxable estate.
- Lifetime Credit Gifts: These are larger gifts that exceed the annual exclusion limit and count against the federal estate tax exemption. For instance, if a mother gifts a farm worth $1,018,000 to her daughter, the excess amount over $18,000 (i.e., $1,000,000) reduces the mother’s estate tax exemption. While no immediate gift tax is due, the exemption is decreased by the value of the large gift. This strategy can be advantageous for gifting appreciating assets, as future value increases occur outside the Giftor’s estate, effectively reducing potential estate tax liabilities.
Strategic Gifting to Optimize Estate Planning
The bulletin outlines several strategies to optimize estate planning through gifting:
- Annual Exclusion Gift Strategy: By consistently making annual exclusion gifts, individuals can gradually reduce their taxable estate. This method is beneficial for those with many potential gift recipients and can effectively lower estate value over time. However, for those with significantly higher estate values, this strategy may have limited impact due to the relatively small amount per gift.
- Lifetime Credit Gift Strategy: Making large lifetime credit gifts before the 2026 exemption reduction can be a powerful tool. For example, a high-net-worth individual might gift $13.62 million in 2024, capturing the higher exemption before it potentially decreases. This preemptive action can save heirs millions in future estate taxes, although it requires careful consideration of the Giftor’s financial security post-gifting.
- Appreciating Assets: Gifting assets expected to appreciate significantly can maximize the benefit of lifetime credit gifts. By transferring these assets out of the estate, future appreciation is not subject to estate taxes, providing a substantial tax-saving advantage.
Considerations and Potential Drawbacks
While gifting can offer substantial benefits, it is not without potential drawbacks. The bulletin emphasizes the importance of understanding these implications:
- Loss of Stepped-Up Basis: Gifting eliminates the possibility of a stepped-up basis at death, potentially increasing capital gains tax for the Giftee upon the sale of the gifted asset.
- Loss of Control and Income: Gifting requires relinquishing control and ownership of the asset, which can be difficult for those reliant on the income generated by the asset.
- Risk of Mismanagement: The risk of the Giftee mismanaging or losing the gifted asset to creditors is a concern, which can sometimes be mitigated through business entities or irrevocable trusts.
The OSU Agricultural & Resource Law Program’s bulletin provides valuable insights into the strategic use of gifting to reduce federal estate taxes. As the potential reduction of the estate tax exemption looms, understanding and implementing these strategies can significantly impact future tax liabilities for farmers and individuals with substantial estates. However, due to the complexity and potential consequences of gifting, it is crucial to seek professional legal and tax advice before taking action.
For a detailed discussion on gifting strategies and their implications, access the full bulletin “Gifting to Reduce Federal Estate Taxes” at farmoffice.osu.edu.
Applying Ohio’s “agricultural exemption” from zoning is a constant challenge for county and township zoning officials. A township in Logan County faced that challenge when a landowner claimed its composting facility to be an agricultural land use that is exempt from township zoning authority. After obtaining a composting permit from the Ohio EPA, the landowner established the compost facility, despite the township’s disagreement that the facility qualified for the “agricultural exemption.”
When there is uncertainty about the meaning or application of a law such as the Logan County zoning situation, Ohio law allows a county prosecutor to request a legal opinion from the Ohio Attorney General (Ohio AG). That’s exactly what the Logan County Prosecuting Attorney did, directing four questions to the Ohio AG that relate to how township zoning regulations, the agricultural exemption, and state permitting laws apply to the compost facility. The Ohio AG’s resulting opinion offers helpful guidance for rural zoning officials who face the challenge of understanding whether a land use is an agricultural land use that is exempt from zoning. It also provides an explanation of the relationship between state issued permits and local zoning authority.
Here’s a summary of the Ohio AG’s response to the questions the Logan County prosecutor raised.
1. Is a compost facility considered “agriculture” that is exempt from township zoning under the agricultural exemption, and if not, is it subject to township zoning?
Logan County didn’t receive a definitive answer to this question. Instead, the Ohio AG explained that it does not have the authority to answer a question of fact. It is the township zoning officials who must determine whether land is “agriculture” for purposes of the agricultural exemption, based upon the facts of the specific situation. In doing so, the township may exercise its discretion and examine any factors necessary and relevant to making its decision, including the nature and character of all activities conducted on the land as well as activities to prepare an agricultural product that are not conducted on the land at issue, and the township’s decision is subject to judicial review.
The Ohio AG did, however, provide a useful summary of the agricultural exemption provisions in Ohio Revised Code sections 519.01 and 519.21, which apply to townships, as follows:
- ORC 519.01 provides a definition of “agriculture” as “farming; ranching; algaculture meaning the farming of algae; aquaculture; apiculture; horticulture; viticulture; animal husbandry, including, but not limited to, the care and raising of livestock, equine, and fur-bearing animals; poultry husbandry and the production of poultry and poultry products; dairy production; the production of field crops, tobacco, fruits, vegetables, nursery stock, ornamental shrubs, ornamental trees, flowers, sod, or mushrooms; timber; pasturage; any combination of the foregoing; and the processing, drying, storage, and marketing of agricultural products when those activities are conducted in conjunction with, but are secondary to, such husbandry or production.”
- The opinion explained that the terms “in conjunction with” and “secondary to” in the emphasized language above carry common meanings: “in conjunction with” means “occurring together” and “secondary to” means “of second rank, importance or value.” Because “composting” is not specifically listed in the agriculture definition, it must be done “in conjunction with” and “secondary to” the production of the agricultural products used for the composting. The Ohio AG stated that, “If the composting facility is located on land that does not engage in agri-cultural activity, composts agricultural products that are not produced on its premises, or does not use the compost on its premises, then the composting facility is likely not “agriculture” pursuant to R.C. 519.01.”
- ORC 519.21(A) contains the limitation on power that is the agricultural exemption: “the Revised Code confers no power on any township zoning commission, board of township trustees, or board of zoning appeals to prohibit the use of any land for agricultural purposes or the construction or use of buildings or structures incident to the use for agricultural purposes of the land on which such buildings or structures are located . . . and no zoning certificate shall be required for any such building or structure.”
- The Ohio AG explained that taken together, ORC 519.01 and ORC 519.21(A) require that land on which the secondary agricultural activities of processing, drying, storage, and marketing of agricultural products occurs or land on which a building or structure is located must “be primarily used for an agricultural purpose to qualify for an exemption from the township zoning resolutions.” Conversely, agricultural activities that are merely an accommodation to a business are not “agriculture” under ORC 519.01 and could be regulated as a commercial use under township zoning regulations.
2. Can township zoning resolutions regulate composting facilities by considering such as a “conditional use” if the zoning resolution does not explicitly address composting as a permitted or conditional use?
A simple explanation by the Ohio AG answered this question. According to Ohio law, A township may only regulate a non-agriculture composting facility as a conditional use if the township zoning resolution includes composting or solid waste facilities as permitted conditional uses in the applicable zoning district.
3. What recourse does a township have if a composting facility claims to be exempt from zoning due to the agricultural exemption, even though composting is not included in the agricultural exemption statute?
For a violation of a zoning resolution or a question regarding the interpretation of a township zoning resolution, the Ohio AG explained that a township may choose to utilize the remedies outlined in ORC 519.23 and ORC 519.24. Those remedies include a criminal cause of action and fines or an action to enjoin or abate a violation.
4. Does a township have any recourse if the Ohio Environmental Protection Agency (Ohio EPA) issues a permit for a composting facility when a property owner failed to secure a local zoning permit?
In response to this question, the Ohio AG explained that while some laws do preempt local authority over a land use, the state solid waste laws do not “supersede the authority of a township to enact zoning regulations.” This means that a township is not required to permit a facility simply because the Ohio EPA issues a permit for it. The Ohio AG concluded that if a township determines that a composting facility is not “agriculture” and not exempt from zoning under the agricultural exemption, that facility then would be subject to the township zoning regulations and Ohio EPA composting facility regulations.
Read Ohio Attorney General Opinion No. 2024-004 in the Opinions Database on the Ohio Attorney General’s website.
Tags: Zoning, agricultural zoning, agricultural exemption, compost
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