Estate planning can be complex for anyone, however, estate planning for farmers has its own unique challenges and opportunities; there are estate tax savings opportunities specific farmers and ranchers. Knowing how to leverage these opportunities can reduce exposure to unnecessary estate and gift taxes, potentially preserving more wealth.
Most taxpayers know that there’s a high lifetime estate tax exemption that’s indexed to inflation — $13.61 million for 2024. However, this high lifetime exemption is scheduled to be cut in half starting in 2026. Current estimates are that the exemption will be approximately $7 million.
This will likely lead many farm couples with estates exceeding $20 million to consider making large gifts between now and Dec. 31, 2025. It’s important to begin planning now as there’s no guarantee that this bonus exemption will be extended.
Joint versus individual gifting strategies
Most married couples usually make joint gifts. However, for major gifts, couples should consider having only one spouse make gifts. This allows the couple to efficiently leverage the bonus exemption; otherwise, the couple may end up with little or no exemption left in 2026.
But what does that mean? The current lifetime exemption is comprised of a base exemption of $6.8 million and a bonus exemption of the same amount. All gifts come out of the base exemption first and the bonus exemption has no value until you fully use the base amount.
Example scenarios
Bill and Jane are interested in making a gift of $13.6 million.
They have two options:
Joint gifting. Bill and Jane each give $6.8 million
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Individual gifting.
Bill gives the full $13.6 million
If Bill and Jane employ option one, they’ll use the base exemption. If the lifetime exemption reverts to $7 million in 2026, they’ll each have $400,000 of exemption available.
However, if they use option two and Bill gives the full gift, he’ll have $400,000 and Jane will have $7 million in 2026. As a married couple, they’ll have an extra $6.8 million to make further tax-free gifts.
This can be more difficult in community property states since each person is deemed to own half of all marital property no matter what the property title is. It can be done but takes extra effort and time.
Estate tax exemption strategies for farm operations
How many times has a family had to sell the farm because of estate taxes? Rarely. In most cases the heirs were waiting for mom and dad to pass so they could sell the farm.
The primary reason heirs don’t need to sell the farm is that the federal government allows heirs to pay farm-related estate tax over time at a very low interest rate. Given the first $7 or $14 million of net value escapes all federal estate taxes, it’s only the excess that’s subject to the 40% estate tax.
The executor of a qualifying estate elects under Section 6166 to defer paying a portion of the estate taxes. Normally, the estate tax is due in full nine months after the date of death. However, the portion of the estate tax related to active assets, such as a farm, can be deferred. The active farm assets must be at least 35% of the adjusted taxable estate.
Most farmers easily meet this requirement. However, if the farmer is no longer farming and simply cash renting the ground or collecting a crop share without participating in the farming, the estate may not qualify.
Interest considerations
The deferral can be interest only for up to five years — first principal payment owed five years and nine months after death — and then amortized over the remaining nine years for a maximum 14-year deferral.
There are two components to the interest rate:
The first $740,000 — inflation adjusted — bears interest at 2%
The remaining amount bears interest at 45% of the applicable IRS underpayment interest rate. This is based on short-term interest rates plus 3% and becomes fixed at the time of election. The current rate is 3.6%.
The good news is that this is a very low rate. The bad news is it’s only available for the portion of the estate tax related to the active farm assets and may require a lien or other security. Estate tax on all other assets is due nine months after death.
Example
Assume Bill passes away with an adjusted gross estate of $20 million and farm assets are $15 million. Total estate tax is $2.56 million with $640,000 due nine months after death. The remaining tax of $1,920,000 can be deferred — 75% of $2.56 million. The first $740,000 bears interest at 2% and the remainder of $1,180,000 bears interest at an estimated 3.6%.
Starting nine months after death the estate pays annual interest of $14,800 — 2% — plus $42,480 — 3.6% — for five years. On the anniversary of the fifth year, the estate will also pay 10% of the remaining 75% estate tax or $192,000 each year — shrinking annual payments. The estate can elect to pay the tax sooner if appropriate.
Partially reduce land values
Another strategy is the ability to partially reduce land values. Section 2032A allows an estate to value farmland at lower values compared to its actual higher fair market value. However, the maximum reduction for 2024 is $1,390,000 — inflation adjusted.
To qualify the taxpayer must meet the following requirements:
The farm estate must be made up of real property used in farming that has a fair market value of at least 25% of the total value of the adjusted estate.
The farm assets, both real and personal, must make up at least 50% of the estate.
The farm real property must have been owned by the deceased or a family member for five of the previous eight years.
The real property qualifying for special land use must pass to a qualifying heir — usually a family member.
For five of the preceding eight years, the qualifying real property must have been farmed or materially participated in by the deceased or a member of the family.
The executor or personal representative must file an election for 2032A, with an agreement signed by each person having an interest in the property, consenting to the liability for any estate tax recapture that may occur later.
One of the heirs must continue to be materially engaged in the farming operation for at least 10 years.
The reduction in value reduces the step-up in basis on the land.
If the farmland is taken out of production or sold to a non-family member during the 10-year period, any estate tax deferred under Section 2032A is owed. An election may be made to increase the basis of the land to its fair market value at the time of the decedent’s death. This can be beneficial if the farmland is sold. However, if the election is made, interest must be paid on the deferred estate tax.
Raising the Section 2032A exclusion to $14 million has been proposed, but it hasn’t been passed. It may pass in the future.
The reduction is based on an assumed cash rental value. The estate determines the five-year average cash rental for comparable land per acre. It reduces it by applicable real estate taxes and then capitalizes it using one of four Farm credit national banks applicable annual interest rates. For most states in the West, the applicable Farm Credit Bank is Co-Bank with an applicable interest rate of 5.30% for 2024. This rate is issued by the IRS each year typically in August.
Example
Assume Bill’s estate meets the Section 2032A requirements and includes 200 acres of farmland worth $20,000 per acre. Comparable average five-year cash rents were $630 and real estate taxes were $20. $610 divided by 5.30% equals $11,509. This allows the estate to reduce the per acre value by $8,491 for a total reduction of $1,698,200. However, the estate is limited to a maximum reduction of $1,390,000 on his estate tax return for 2024.
The election is placed on specific parcels of ground which allows the estate to pick and choose the most appropriate ground for the election. This is especially important if some of the ground may be sold within the first 10 years; there wouldn’t be election on that farmland.
Oregon estate tax exemption
Oregon only allows a $1 million exemption for estate taxes; however, it does have a special Natural Resource credit available to estates of less than $15 million.
Farmland must be in Oregon to qualify, and it requires that at least 50% of the estate is qualifying farm property to take the credit. The maximum credit that may be claimed on the estate return is limited to $7.5 million, however, the estate isn’t required to elect the maximum credit allowable.
Instead, the beneficiaries can:
Elect a lessor amount
Elect the credit only on certain assets
Elect not to take the credit
The primary reason for not taking a full credit is the potential recapture of the credit.
If the farm property fails to be farmed for five of the eight years after death, then part or all of the credit must be repaid. The heirs are required to file a form with Oregon each year verifying that the assets continues to qualify.
Example
Assume that farm property qualified for a $400,000 credit and is disposed of two years after death. The heirs would be required to repay 60% of the credit or $240,000 since it’s no longer being farmed by the heirs. However, a 1031 exchange of land into farmland won’t require recapture.
The state applies a ratio of the elected natural resource credit to the total estate times the actual tax paid. For example, assume an estate has a total adjusted gross estate of $6 million, an Oregon adjusted gross estate of $2 million, Oregon Natural Resource property of $1.2 million, and owed $179,025 of Oregon estate tax.
The credit would be $35,805 calculated as follows:
$179,025 x (1,200,000 / 6,000,000) = $35,805
Normally, the credit would be 60% of the Oregon tax. or $107,415, since the Oregon natural resource property is being used against total Oregon taxable estate. Oregon seems to penalize the estate by making the credit equal to the Oregon natural resource property divided by total assets, including assets outside of Oregon that aren’t subject to Oregon estate tax. The only time the estate would get full credit is if the Oregon and total adjusted gross estate values were equal.
Cash used in the farm operation may also qualify for the credit, however, if this cash is used to pay federal or state estate taxes will require recapture.
Therefore, if the heirs know that certain assets will be sold or not qualify, then perhaps not electing the natural resource credit on that property is appropriate. This is especially true if total farm assets exceed $7.5 million. In this case only electing the natural resource credit on assets that heirs know won’t be sold or disposed of is the best choice.
In addition, if the estate is greater than $15 million, no credit is allowed in Oregon.
State tax for real property
Oregon land is considered real property and is subject to state estate tax if your total adjusted taxable estate exceeds the exemption amounts. Land value located in the state can be less than the exemption amount and still be subject to Oregon estate taxes.
Example
Assume that Bill owns land in Oregon worth exactly $1 million, and doesn’t qualify for the natural resources credit. His total estate value is $10 million. Although his land value doesn’t exceed the exemption, the estate is required to file and pay Oregon estate taxes. The form calculates the estate tax assuming that Bill’s estate value in Oregon is $10 million and then assess 10% of this amount as the estate tax owed to Oregon.
However, it may be possible to place the land into an LLC or similar entity and convert this real property to intangible property. If at the time of death, the owner is no longer an Oregon resident, the Oregon estate tax won’t apply since intangible property isn’t subject to estate tax for non-residents.
Care must be taken to make sure the land is truly intangible property outside of the state and these rules are constantly in a state of flux. Always review this with your estate planning professional.
