Farming is a tradition and a multi-generational family business for some residents of Michigan. Farmers take pride in operating a profitable business that they can pass on to their children after they pass away. However, are farms subject to federal estate taxes after a farmer dies?
Current law on federal estate taxes
The number of estates subject to the federal estate tax is not very high. Currently only those whose estates are worth more than $11.58 million for single taxpayers or double that for married taxpayers must file a federal estate tax return. However, this exemption amount is temporary and will decrease to $5 million starting January 1, 2026, although this amount will be adjusted for inflation.
Farms receive special estate tax protections
Federal law has provisions that reduce the amount of estate tax owed by farms. For example, for estate tax purposes a farm is valued at its farm-use value instead of its fair-market value. If a farm does need to pay estate taxes they can do so in installments. Farmers can also donate some of their property as easements or other development restrictions. This can help reduce the size of their estate for estate tax purposes. These provisions have helped reduce the number of farms that would have to file an estate tax return to 189 estates in 2020. To put it another way, in 2020 only 0.16% of the over 31,000 farm estates owed estate taxes.
Will you be subject to federal estate taxes?
Most estates in the U.S., farms included, will not be subject to federal estate taxes upon the property owner’s death. This can help farmers keep their farm in the family. It is okay if you find the topic of estate taxes somewhat confusing. It is a complex area of law but one that is important to understand when you are estate planning. With the right help, you can find ways to maximize the value of your estate while still reducing the amount you may owe in federal estate taxes, if you must pay them at all.