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Author's note: Based on the passage of the Tax Cut and Jobs Act this post is no longer correct. An updated post will be provided in the future.
In October, the IRS announced the revised federal estate tax and gift tax limits for 2018. The 2018 federal estate tax limit will increase from $5.49 million to $5.6 million. The federal gift tax limit will increase from $14,000 in 2017 to $15,000 in 2018. In Maryland, state estate tax limits will increase to $4 million, up from $3 million in 2017.
Federal Estate Taxes
For 2018, the federal estate tax limit will increase to $5.6 million for an individual and $11.2 million for a couple. Since a deceased person owes federal estate taxes on a taxable estate, The taxable estate is the gross estate minus allowable expenses and deductions. For more information see Lynch, Goeringer, and Musser, Estate Planning for Maryland Farm Families: Updated for 2014 (FS-972, 2014).
For example, a farm couple has a taxable estate of $12 million and passes away in 2017. The couple’s heirs would be able to exempt up to $11.2 million from federal estate taxes, only owing federal estate taxes on $800,000. With the federal estate tax rate at 40 percent, the heirs would owe $320,000 in federal estate taxes.
One last note on federal estate taxes: a surviving spouse has an unlimited marital deduction and can include the predeceasing spouse’s unused federal estate tax limit in their own federal estate tax limit. This concept is known as portability, and more information on it is here.
Federal Gift Tax Limit
Federal tax law allows each spouse to gift up to $15,000 to one individual without that individual incurring federal gift taxes, up from $14,000 in 2017. This exemption is tied to inflation, but can only increase to the nearest $1,000 amount.
Maryland Estate Tax Limit
Since 2015, Maryland has been recoupling to the federal estate tax limit. The Maryland estate tax limit will increase by $1 million from 2016 to 2019 and then will be recoupled, or tied, to the federal estate tax limit (rising with inflation each year). In 2018, the Maryland estate tax limit will be $4 million.
In 2012, the state of Maryland created a special program for qualifying agricultural property. This program exempts up to the first $5 million of qualified agricultural property from Maryland estate taxes. The agricultural property must remain in agriculture for the next ten years to be eligible. To learn more about this program, Lynch, Goeringer, and Musser.
How Does This Impact You?
Benjamin Franklin once wrote, “In this world, nothing can be said to be certain, except death and taxes.” With that in mind, farm families concerned about hitting the top federal estate tax exemption or the state estate tax exemption need to begin working on a farm succession and estate plan to limit potential estate taxes down the road. Working with a tax advisor early on can help limit your taxes and can yield a tax plan to keep the farm in operation for future generations. Failure to properly plan can force surviving family members to sell family assets to pay taxes on the inheritance. In addition to a tax advisor, consider working with additional team members, such as an attorney and financial planner, to begin developing the family’s farm succession plan.
For those of you yet to develop estate tax plans,you might want to meet with your farm succession team members if the increases in the estate tax limits impact your plan. While such a change may not affect your succession plan, it gives you an opportunity to discuss other changes in the farming operation over the past year.