Federal Rules

When we talk about federal estate taxes, we are talking about taxes that are paid to the IRS when property passes to heirs. These taxes will be paid from the estate before assets are distributed to heirs and successors. Current federal estate taxes only impact very wealthy individuals.  In 2023, farmers with estates valued up to $12.92 million would owe no taxes at death. In 2022, when the limits were very similar ($12.06 million), only 87 farms, or 0.22% of all farms being passed on owed estate taxes. Source

These threshold amounts are called “estate tax exemptions” because the estate tax law exempts a certain amount of assets from taxation at death. Currently, those exemptions are higher due to legislation passed in 2017. The exemption amount increases annually so as to keep up with inflation. In 2024, the exemption will reach $13.61 million but will peak in 2025 at $14.02 million. Absent congressional action, the exemption is set to be slashed in half for 2026 down to $7.14 million. See the next section, “Estate Tax- Anticipated Changes,” for more information on what to expect in 2026.

Anyone who dies with assets above the current exemption amount will have to file an estate tax return. However, after deductions for qualifying expenses, debts, and bequests, only a portion of those filing an estate tax return will have actually to pay taxes. Going back to the 2022 statistics, 0.99% of all farm estates did have to file estate tax returns. But again, only 0.22% of all farm estates had to pay an estate tax. So, 0.77% of farm estates that filed ended up having no estate tax liability.  All in all, we are talking about very, very few farms transitioning generationally that will be subject to estate taxes.

There is no separate federal “inheritance tax” that would be owed from the person receiving the estate as part of its distribution to heirs and successors.

Married Individuals

Wealthy married individuals enjoy two major benefits regarding estate taxes. However, take caution because these two benefits cannot be used together.

First, there is the estate tax marital deduction, which means that a spouse can transfer an unlimited amount of assets to their spouse without any tax liability. This interspousal marital tax deduction applies to gift taxes as well, so this transfer can occur during the lifetime of the estate holder.

The second benefit is that the estate tax exemption can be combined for spouses. So, the $12.92 million exclusion for 2023 becomes $25.84 million for a married couple. However, if one spouse gifts the other spouse assets through the estate tax marital deduction, the estate tax exemption cannot be doubled.

Say there is a wealthy couple worth $24 million collectively. If the first spouse dies in 2025, the estate is below the exemption amount, and no estate tax liability will be owed. However, if the first spouse used the marital deduction to transfer assets to their spouse, the original spouse’s lifetime exemption is lost. The surviving spouse, in that case, would owe estate taxes if they died later in 2025 because they would only have their own personal exemption ($14.02 million) to protect against estate taxes.

State Rules

Federal rules set the minimum tax rates, but states can, and some do, impose their own estate tax rules.  There are thirteen states (including Washington, D.C.) that impose estate taxes. Many states that have an estate tax have lower estate tax exemptions than the federal government. This means that state estate taxes can apply in cases where federal estate taxes would not. In some cases, having paid state estate taxes will lower your federal estate tax liability.

Even fewer states also impose an inheritance tax, which is due from the successor or the person receiving the estate or a portion thereof.

The charts below give an overview of states with estate and inheritance taxes. There is a fair amount of movement in this area of the law as states work to get closer to federal exemptions, phase in legislative decisions, or adjust amounts for inflation. Always check with a trusted tax advisor for the most up-to-date information.

States with Inheritance Taxes

Unless Congress acts, the current estate tax exemption scheme is set to expire at the end of 2025. As it stands now, the exemption levels will be cut in half. This will greatly increase the number of people who will be subject to estate taxes but will still only include those who own assets valued at approximately  $7 million and above.

Over the last 25 years, the total number of estates owing taxes has decreased. However, it was never a high percentage of estates. At the turn of the millennium, just over 2% of estates owed federal estate taxes, but by 2019, that percentage had dropped to 0.08% of all estates. The bottom line is that even if the anticipated changes occur, middle and lower-class families will still not be subject to federal estate taxes. Be sure to check your state’s rules as well!

However, there will be many estates that might not be prepared for the changes upcoming in 2026.  These estates will need to work with trusted professionals to manage their wealth by the end of  2025 to be best prepared for the changes. Of course, these issues are highly political, and the anticipated outcomes for 2026 could be very different after the next presidential election.

Federal gift taxes refer to the taxes levied on gifts. Over one’s lifetime, a person can give away an amount equal to the estate tax limits. In 2024, that amount is $13.61 million. However, there is a separate annual exclusion, which allows folks to gift a certain amount each year without counting toward one’s ones lifetime exclusion. In 2024, the annual limit for gifting without tax liability is $18,000 per recipient. Each spouse in a married couple can gift the same limit to the same recipient. Therefore, parents who are still married can each gift their child $18,000 in 2024 (for a total of $36,000) without triggering a gift tax liability.

In practice, this means that people can gift a lot of money on an annual basis without impacting their lifetime limits. This makes annual gifting a very effective way to reduce one’s taxable estate if one’s assets are reaching the lifetime limits. Each year, a person can give that year’s limit to any number of individuals and certain types of trusts, money tax-free. These gifts do not accrue and are not considered part of one’s estate at death, nor do they impact the lifetime gift limits.

If an individual does gift a parcel of property worth, for example, $50,000 to a single recipient one year, then the gift amount over that year’s limit will count towards one’s lifetime gift limit. Thus, if the parcel were gifted in 2024, and was valued at $50,000.00, then $32,000 of that gift would be applied to one’s lifetime gift limit.

There are both lifetime and annual limits on how much can be given away without creating a tax liability for oneself. The lifetime gift limits are the same as the estate tax amounts, so in 2024, that limit is $13.61 million dollars. However, there is also an annual limit on the value of gifts that any individual can give without incurring tax liability.

For the year 2024, individuals can gift up to $18,000.00 per recipient. Each member of a married couple can give this amount to the same recipient.

The gift tax applies whether you are transferring assets to an individual or to a trust you created to hold the assets, so one must be aware of the gift tax limits. Refer back to the section on trusts to learn how different types of trusts can help you meet your tax goals.

When a farmer gives away or sells any property, including to a trust–whether it’s land or equipment– the transfer could be taxable. It is important to question what taxes the transfer might trigger for either party–the farmer giving or selling the property or the successor/trust that is receiving or buying the property. As we’ve seen above, estate and gift taxes will impact only the very wealthy. But there are other taxes that could impact transfers at death or transfers during one’s lifetime. Much of the concern here can be addressed by what is often called basis planning. 

The basis for an asset or piece of property is the portion of the asset’s value that has already been taxed. Usually, this boils down to the original cost (purchase price) of the property, taking into consideration any adjustments to that original price. For example, the basis can be adjusted up for appreciation or the price of investments into the property to improve it. If the property is a business asset, then the basis could also be adjusted down for depreciation or for certain expenses incurred during ownership.

A person holding property that they might soon sell will benefit if the basis of that property (the property’s value that has already been subject to taxes) is close in value to what the property is currently worth. If the gap between what the property is currently worth and its basis is large, that means the tax liability will also be large because there is a large portion of the property’s value that has yet to be taxed. Generally, getting a basis adjustment is beneficial because it means less value will be taxed. This means that the property’s basis will be adjusted from the original basis to the fair market value at the time of transfer. When this type of basis adjustment increases the original basis, it is called a stepped-up basis adjustment. In this situation, there is no gap between the basis and the current value of the property, so tax liability is eliminated.

On the other hand, some transfers only allow a carryover basis. This means that the property’s basis won’t be adjusted, so the person receiving the property has to use the original basis. This means the person receiving the property may owe taxes on the transfer. If the property has appreciated in value, then the gap between that carryover basis and the current market value will be large. And, when that gap is large, so is the potential tax liability.

Does the aspiring farmer get a stepped-up basis or do they have to take the carryover basis? The determining factor in which basis is applicable is when the property is transferred. Is it transferred at death or during the lifetime of the original farmer-owner? If the property is transferred at death, then, usually, that property receives a basis adjustment. If the property is, instead, transferred during the lifetime of the original farmer-owner, then, typically, that property receives a carryover basis.

Let’s look at an example to help illustrate this concept. We will use land as the property in question. 

• In 1999, 200 acres of farmland was purchased at $1250/acre for a total cost of $250,000.
• In 20254, these 200 acres have appreciated in value to $3125/acre for a total value of $625,000.
  • The original bases of this property is $250,000. 
  • The current fair market value of the property is $625,000.  (We won’t consider any special use valuation or other complicating factors at this time). 
  • The stepped-up basis could be $625,000 if the transfer meets the requirements, or the carryover basis would be $250,000 if the transfer doesn’t meet requirements for getting a stepped-up basis. 

In the example above, if the farmer-owner decided to sell the property while they were still alive, the farmer-seller would incur taxes on the difference between their basis and the current market value, which is $375,000. The amount of those capital gains taxes would depend on many factors, including the farmer’s income bracket and marriage status.

If, instead, the farmer-owner waited to pass the land via their estate plan at their time of death, then the successor would receive a stepped-up basis of $625,000. This means the successor could sell the land shortly after the original farmer-owner’s death without incurring capital gains tax liability. If the successor sells many years later, they would use the stepped up basis at the time of the transfer at $625,000. If the land sold for $700,000 the untaxed value of $50,000 would then be subject to tax.

And finally, if the original farmer-owner gifted the land to a successor during the farmer’s lifetime, there is a large potential tax liability if that successor turned around and sold the property. This is because this successor’s basis would be the carryover basis that equals the original basis amount– $250,000. So, if this successor sold the land, they would have to pay the applicable capital gains taxes on their $375,000 profit.

Notice that these tax events happen only if the land is sold. If a farmer gifts land to a chosen successor during the farmer’s lifetime, there is the tacit encouragement to hold onto that land and never sell in order to avoid the high tax liability that comes with carryover basis. And, if a successor has devised land via an estate plan but doesn’t sell the land, then their stepped-up basis doesn’t immediately impact them.

Equipment

Equipment is taxed differently than land because, as a general rule, land appreciates in value, whereas equipment depreciates. Farmers may have taken deductions from their taxes over the life of the equipment. These factors will impact tax liability if the equipment is sold or given away during the lifetime of the farmer.

Owners of property that wears out over time, like equipment, can be deducted from one’s ordinary income in amounts determined by the IRS. This process is referred to as depreciating the asset. There are several ways the IRS defines depreciation and allows it to be taken. Explanations of these methods are beyond the scope of this guide, but an accountant can help with depreciation schedules for your equipment.

The important point for succession or passing on one’s equipment is that depreciation deductions can be ‘recaptured’ or taxed once the property is sold or exchanged! Whatever gains the farmer-owner garnered by taking depreciation deductions over the life of the asset will be considered ordinary income and taxed at that tax rate.

For example, say a farmer purchased farm machinery for $50,000. Later, after the machinery had been fully depreciated, the farmer sold the machinery for $20,000. The farmer didn’t make any capital gains because the asset depreciated in value. However, the farmer did benefit tax-wise because, over the years, the cost of the machinery was recovered through depreciation deductions from the farmer’s income.  Therefore, this farmer would owe ordinary income tax on the $20,000 they made from selling the equipment. Note that ordinary income tax rates are generally higher than capital gains tax rates.