Be aware of applicable inheritance tax laws

If you’ve thought about estate tax for as long as I have, you’ll remember the estate tax exemption of $600,000 per person.

Twenty-five years ago, many more people than today had to consider “death tax.”

Many families had separate mom and dad trusts in an effort to double the rather small exemption. Many farmers would be in trouble today if the exemption were still that low, given that some 40-acre fields are worth over $600,000.

Over the past 20 years, we’ve seen the estate tax exemption increase to $12.06 million for 2022. That’s good news for farmers and millions of small business owners. .

In addition to the increased exemption amount, a spouse can now elect to receive the unused portion of the spousal exemption (known as portability). If either spouse dies with $7 million in assets, the surviving spouse’s exemption can expand to include the unused $5.06 million.

It all adds up to the fact that most people don’t have to worry about property taxes.

An April 2021 report from the USDA Economic Research Service stated that less than 1% of farm estates owed estate taxes in 2020. Yet, for farms where the tax is applicable, taxes on estates can still be expensive.

Taxable estates are affected with 40% of their taxable assets over $1 million. Thus, individual estates in 2022 worth more than $13.06 million will pay a marginal estate tax rate of 40%, unless existing tax laws change.

The Tax Cut and Jobs Act, which came into effect on January 1, 2018, essentially doubled the estate tax exemption, and this provision is currently set to expire at the end of 2025. However, some legislators are eager to obtain these revenues. property taxes rose earlier.

The Build Back Better Act (BBBA) passed the House in November. While it’s unclear at the time of this writing what, if any, provisions will pass the Senate, the House bill calls for the estate exemption to revert to $5 million, indexed to inflation, effective January 1, 2022. This amount is estimated to be approximately $6 million per person.


Effects on other strategies

The BBBA could eliminate a strategy for removing assets from a taxable estate: the government can start including assets that a deceased person placed in a grantor trust. This would only apply to trusts created after the enactment of the BBBA or to contributions made after the date of enactment to existing grantor trusts.

The BBBA also proposes to eliminate valuation haircuts for lack of control or lack of marketability that are attributable to cash or marketable securities held by LLCs and partnerships.

The gradual gifting of small ownership shares of family-owned LLCs is a strategy that tax attorneys and CPAs have used for many years. The purpose is to remove assets from a potentially taxable estate. Due to gift tax reporting and estate exemption limitations, discounting minority interests may allow the transfer of ownership to occur in higher percentages or more quickly. This makes each minority owner’s interest less valuable. Basically, the sum of the parts of a family LLC has been allowed to total less than the whole, and the government would like to put an end to that.

Reports, interaction with property taxes

The interaction between gift tax reporting and inheritance tax is widely misunderstood. Most people think that if they donate more than $16,000 (the new 2022 limit), someone will have to pay some kind of tax. It doesn’t, unless you donate more than $12 million in your lifetime.

The $16,000 per year threshold is simply when you must report the gift to the government. The IRS then reduces your lifetime tax exemption by the amount of the reported gift. Therefore, if you claim a gift of $200,000 to your child, your new estate tax exemption amount is $12.06 million minus $200,000 or $11.86 million for 2022. therefore not the gift tax return.

Reinforced Base Elimination

At some point last year, the Biden administration suggested eliminating the tough base provision from the tax code. The laddered basis allows heirs to inherit assets, such as land, at fair market value on the date of death. This then allows the heirs to sell their interest free of capital gains tax, provided the sale takes place shortly after death. Many years later, the value of the property can increase significantly, resulting in increased capital gains tax from the date of death.

If the progressive basis were eliminated, the heirs would receive a deferral basis. This means that whatever mom and dad paid for the land would become the basis for the heirs.

After farmers and rural legislators refused, the proposed elimination was eliminated.

A proposal was also launched at some point last year to tax inherited assets over $1 million at the time of death. This idea was also abandoned.

Another revenue stream discussed last year by the House Ways and Means Committee was the elimination of the 1031 exchange. The 1031 exchange allows you to defer capital gains tax on a property by exchanging it against a similar investment property, such as one farm against another. Tax-deferred trading is an important component of capital flow in the real estate investment community, including agricultural investors. Losing it would have been a major disruption to the real estate market, in my opinion.

Other related proposals launched in 2021 were the idea of ​​limiting deferred 1031 capital gains to $500,000 per year and increasing the top capital gains tax rate from 20% to 39.6%. None of these proposals have been enacted, at least not yet.

States with Inheritance Tax or Inheritance Tax:











New Jersey

New York



Rhode Island



State tax implications

When gurus talk about estate taxes, they often miss an important point – evading federal taxes doesn’t always mean you’re evading state estate taxes. Seventeen states have inheritance or succession rights. Some state exemption levels are only $1 million, or even $0 in some situations. If you live in one of these states, find out exactly what exemption levels and tax rates apply.

You may not need to live in the state for the estate tax to apply. Many people are surprised to learn that they owe estate tax in Illinois, even if they have never been there. If you have real estate in Illinois and at least $4 million somewhere in the United States, you will owe something.

For example, if you have $4 million in Florida and inherited a $10,000 parcel in Illinois, you will owe some Illinois estate tax. The state, like several others, is decoupled from the $12 million federal exemption.

I have prepared a few estate tax returns over the past two years involving farms and in all cases the estate did not owe federal estate tax but owed state estate tax; a subject for a future article.

About Keneth T. Graves

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