Updated: Apr 11, 2021
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In November, the IRS announced the revised federal estate tax and gift tax limits for 2019. The 2019 federal estate tax limit will increase from $11.18 million to $11.4 million. The federal gift tax limit will remain at $15,000. In Maryland, state estate tax limits will increase to $5 million, up from $4 million in 2018.
For 2019, the federal estate tax limit will increase to $11.4 million for an individual and $22.8 million for a couple. The taxable estate is calculated as the gross estate minus allowable expenses and deductions.
For example, a farm couple has a taxable estate of $23 million, and both pass away in 2019. The couple’s heirs may exempt up to $22.8 million from federal estate taxes, only owing federal estate taxes on $200,000. With the federal estate tax rate at 40 percent, this means the heirs would owe $80,000 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 requires the estate to file the appropriate tax documents to preserve it for the surviving spouse.
Federal tax law allows each spouse to gift up to $15,000 to one individual without that individual incurring federal gift taxes. This exemption is tied to inflation, but can only increase to the nearest $1,000 amount. A couple may gift up to $30,000 to any individual.
Any gift over $15,000 per person would be deducted against the federal estate tax exemption. For example, if a couple gave a child a gift of $31,000, or $1,000 over the gift tax exclusion, the federal estate tax exemption would be reduced by $1,000, putting it at $22.799 million for the couple.
In 2018, the Maryland General Assembly set the estate tax exemption at $5 million and since it is not indexed to inflation, it will not increase annually. For a couple, this exemption would be $10 million with portability. For example, a farm couple passes away in 2019 with a taxable estate of $11 million. The heirs would owe Maryland estate taxes on $1 million, the amount over the exemption. Maryland estate tax is set at 16 percent, and state estate taxes would be $160,000.
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 farm property from Maryland estate taxes. The agricultural property must remain in agriculture for the next 10 years to be eligible.
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 result in a tax plan keeping 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, farm families should 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 to determine how the estate tax limits will impact you. While such a change may not affect you, it gives you an opportunity to discuss other changes in the farming operation over the past year and begin to developing a farm succession plan.