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.

Discover unique, farm-specific estate tax exemption opportunities and how they can benefit farm and ranch owners.

Background on the Lifetime Estate Tax Exemption

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 December 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
• 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

There are two areas to consider when approaching gift and estate tax:

• Tax deferral
• Partially reducing land values

Tax Deferral

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.

Washington’s 100% Farm Value Deduction

The Washington State estate tax has the highest estate tax rate in the country at 20% on taxable estates over $9 million. However, there’s an unlimited farm deduction for all farm assets assuming the farmer qualifies.

These qualifications are as follows:

• The decedent must be a citizen or resident of the United States.
• The farm property must pass to or be acquired by a qualified heir from the decedent.
• The farm property must have been used in farming at the time of the decedent's death.
• The decedent or a member of the decedent's family must have used the farm property at the time of death.
• The farm property must make up at least 50% of total estate’s adjusted gross value. The estate’s adjusted gross value is the total gross estate less any mortgages or indebtedness on such farm property.

For farmland to qualify it must also meet the following provisions for at least five of the previous eight years:

• The decedent or a member of the decedent’s family owned the real property.
• The real property was used for a qualified use by the decedent or a member of the decedent’s family.
• There was material participation by the decedent or a member of the decedent's family.
• Farm real property must be at least 25% of adjusted gross value of the estate.

Example

Assume Jane passes away in Washington state with a total adjusted gross estate of $15 million. She owns farm real estate of $5 million and other farm assets totaling $3 million. She meets all the other farm deduction requirements.

Since the farm real estate value exceeds 25%—33.3%—and total farm assets exceed 50%—53.3%—then the estate may deduct $8 million from her estate tax return saving approximately $1.5 million in Washington estate tax.

However, if Jane decides to give $1 million of the farm assets to her kids before she passes, all the farm property must be included in her estate return. This will cost the heirs over $1 million of additional Washington estate taxes.

Unlike the federal rules that require the heirs to own the property for at least 10 years after death, Washington state doesn’t have these requirements. The requirements must simply be met before death. After death the heirs can do as they wish with the assets including selling them immediately after death.

A farm couple in Washington state may typically see the assets pass to the surviving spouse on the death of the first spouse with no Washington state estate tax being owed. However, it’s important to closely watch the farm values versus the total estate values. Gifting of non-farm assets may be more appropriate to keep the 25/50% ratios in place to allow the full farm deduction on the death of the surviving spouse.

Since all the assets get a step-up at the death of the first spouse, another strategy is to gift enough non-farm assets to get the surviving spouse’s non-farm estate down to the current lifetime exemption amount—about $2.2 million. This allows the estate to have a full farm deduction and owe no Washington estate tax on the remaining non-farm assets.

State Tax for Real Property

Land located in Washington is considered real property and will be subject to state estate tax if your total adjusted taxable estate exceeds the exemption amounts. Land value located in Washington can be less than the exemption amount and you will still be subject to state estate tax.

Example

Assume that Bill owns land in Washington worth exactly $1 million and it does not qualify for the farm deduction. His total estate value is $10 million. Although his land value doesn’t exceed the exemption, the estate will be required to file and pay Washington estate taxes. The form will calculate the estate tax assuming that Bill’s estate value in Washington was $10 million and then assess 10% of this amount as the estate tax owed to Washington.

However, the land may be placed into an LLC or similar entity and convert this real property to intangible property. If at the time of death, the person is no longer a Washington resident, the heirs will escape Washington estate tax since intangible property isn’t subject to estate tax for non-residents.

Washington originally required a business purpose for placing real estate into an LLC to become intangible property, but removed that rule effective June 1, 2020.

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.

We’re Here to Help

To learn more about upcoming changes to Washington’s farming-related estate taxes and how best to plan for them, contact your Moss Adams professional.

Additional Resources

• Agribusiness Practice
• Estate Tax Planning Services