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Overview of the federal estate tax for farmers and ranchers

Tiffany Dowell Lashmet Published on 24 April 2015

Over the past decade, federal estate taxes have often been in the news and a major concern for farmers and ranchers. In 2008, the estate tax exemption was only $2 million. Thus, a person whose taxable estate at death was worth over the $2 million exemption was required to pay federal estate taxes on the amount over the $2 million exemption.

Many agricultural operations in the U.S. have assets in excess of the $2 million value, meaning these operations would be subject to the hefty estate tax. In a move favorable for American agriculture, Congress passed a law in 2013 making the estate tax exemption $5 million, increasing each year for inflation.

Under the current law, less than 2 percent of family farms and ranches in the U.S. will be subject to the estate tax. In fact, a study conducted in 2013 found that only 20 family farms and ranches nationwide were subject to the estate tax that year.

Regardless, it is important for farmers and ranchers to understand the basics of the federal estate tax and work with their accountants and attorneys to ensure they limit their potential tax liability.

  • What is the federal estate tax? The federal estate tax is a tax on a person’s right to transfer property at death. Transfers from one spouse to another at the death of the first are subject to an unlimited marital deduction.

    So, for example, if a husband passes away and leaves his farm to his wife, that farm is not subject to the federal estate tax. When the wife dies, however, the farm would be part of her gross estate and taxes would be owed if her taxable estate exceeded the estate tax exemption.

  • How is taxable value of an estate calculated? The value of a person’s estate at death is calculated by determining the fair market value of all assets.

    This includes real property, cash, investments, business interests, and in some cases, life insurance policies. The total of these assets constitutes the “gross estate.” Next, certain deductions are taken from that gross estate value to determine the taxable estate. These include items like mortgages and certain other debts.

  • What are the current estate tax rules? In 2013, Congress “permanently” set the federal estate tax exemption at $5 million, adjusted each year for inflation.

    I place the word permanent in quotation marks because this is only permanent so long as Congress does not decide to modify the exemption amount in the future.

    For persons dying in 2015, the estate tax exemption is $5.43 million per person. Any estate worth more than the exempt amount is required to pay a 40 percent tax on the non-exempt amount.

  • What is portability? Portability allows the unused exemption amount of one spouse’s estate to be transferred to the surviving spouse.

    For example, if the husband passed away in 2015 with $2.43 million, the remaining $3 million of exemption his estate did not need to use could be transferred to his surviving wife, allowing her to add his remaining $3 million to her $5.43 million exemption for a total exemption of $8.43 million.

    Importantly, in order to elect portability, the deceased spouse’s estate must file a Form 706 with the IRS within nine months of the person’s death.

All farmers and ranchers should consult with their accountants to determine the estimated taxable value of their estate. This analysis should be conducted on a recurring basis, as market value of assets – particularly land – can greatly increase over time.

Anyone whose estate may be worth anywhere near the $5.43 million exemption should discuss this issue with an accountant and attorney to analyze the potential tax liability, determine what steps may be taken to reduce or avoid this liability and plan for affording tax payments if avoidance or elimination of the tax is not possible.  end mark

Tiffany Dowell Lashmet
  • Tiffany Dowell Lashmet
  • Assistant Professor & Extension Specialist - Agricultural Law
  • Texas A&M AgriLife Extension Service

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