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In October 2020, the IRS announced the revised federal estate tax and gift tax limits for 2021. The federal estate tax limit will rise from $11.58 million in 2020 to $11.7 million in 2021. The federal gift tax limit will remain at $15,000 in 2021. In Maryland, state estate tax limits will stay at $5 million.
Federal Estate Taxes
For 2021, the federal estate tax limit increases to $11.7 million for an individual and $23.4 million for a couple. 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 with a taxable estate of $24 million passes away in 2020. The couple’s heirs would be able to exempt up to $23.4 million from federal estate taxes and only owe federal estate taxes on $600,000. Since the federal estate tax rate is 40 percent, the heirs would owe $240,000 in federal estate taxes.
One last note on federal estate taxes: a surviving spouse has an unlimited marital deduction, and the surviving spouse 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 on it is here.
Federal Gift Tax Limit
Federal tax law allows each taxpayer to gift up to $15,000 per year to one individual without incurring federal gift taxes. The federal gift tax limit remains at $15,000 in 2021. This exemption is tied to inflation, but can only increase to the nearest $1,000 amount.
Maryland Estate Tax Limit
In 2018, Maryland’s state estate tax exemption was set at $5 million and will remain at $5 million until changed by the General Assembly. For a couple in Maryland, the state estate tax exemption is $10 million. In 2018, the General Assembly allowed for portability of unused Maryland estate tax exemption, similar to federal portability. The maximum tax rate is 16 percent, and the Maryland inheritance tax remains unchanged.
In 2012, the state of Maryland created a unique program which 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, see 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 devise 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. Along with 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 who need to develop estate tax plans, you should discuss with your farm succession team members if the increases in the estate tax limits impact your plan. Although this change may not affect your succession plan, it allows you an opportunity to discuss other changes in the farming operation over the past year.