estate taxes
The federal estate tax exemption is set to drop dramatically in 2026—from $13.99 million in 2025 to an estimated $7–$7.5 million per person. For some farm families, this shift could result in significant estate tax exposure. While most estates won’t exceed the new limit, some farmers, especially those with high-value farmland or appreciating assets, will find themselves suddenly at risk of federal estate taxes.
Gifting is one strategy to reduce the size of your taxable estate, but it’s not always simple or risk-free. Let’s explore when gifting can help, when it might not, and what to watch out for.
Two Types of Gifts
There are two main gifting categories under federal law:
- Annual Exclusion Gifts – In 2025, you can gift up to $19,000 per recipient ($38,000 for couples) annually without using any of your lifetime exemption.
- Lifetime Credit Gifts – Larger gifts are allowed, but they reduce your lifetime estate tax exemption. The lifetime estate tax exemption is the amount of wealth that the IRS exempts from estate taxes. The exemption can be used at death, gifted away during life, or a combination of the two.
Example: If a parent gifts a $1,019,000 farm to a child, the first $19,000 is exempt from taxes and does not reduce the parent’s estate tax exemption. The remaining $1,000,000 reduces the parent’s lifetime estate tax exemption from $13.99 million to $12.99 million.
Gifting Strategies That Work
1. Annual Exclusion Gifts
If you're just slightly over the expected 2026 exemption, annual gifts can move you back under the limit.
Example: A grandparent with 10 grandchildren can gift $190,000 per year. Over 2 years, that’s $380,000—enough to reduce a modest estate and eliminate taxes.
But for high-net-worth individuals, $19,000 per person may be too little to make a significant impact.
2. Lifetime Gifts of Appreciating Assets
Large gifts don’t directly reduce estate tax liability (since they reduce your exemption), but they remove future appreciation from your estate.
Example: If you gift farmland worth $1M that later appreciates to $3M, only $1M is deducted from your estate tax exemption — the $2M in appreciation escapes estate taxation entirely.
Potential Downsides of Gifting
- No Stepped-Up Basis. Gifting assets during life means recipients take your original tax basis, not the stepped-up value at death—potentially increasing future capital gains taxes.
- Loss of Control & Income. You must fully give up ownership and control. Gifting income-producing property could impact your financial security.
- Risk of Financial Mismanagement. If a gifted asset is lost to debt, lawsuits, or divorce, it's gone. One solution? Use an irrevocable trust to hold the gift—this protects assets while still benefiting your heirs.
Another Strategy: Pay Directly for Education & Medical Expenses
The IRS allows unlimited direct payments of tuition or medical bills without using your exemption. But payments must go straight to the provider, not to the individual.
Example: Grandpa has a $9 million estate and wants to reduce its size before the federal estate tax exemption drops in 2026. He has four grandchildren in college and a daughter who recently underwent surgery.
Grandpa pays the following directly:
- $20,000 in tuition for each grandchild (4 x $20,000 = $80,000) directly to their universities
- $25,000 in hospital bills paid directly to the hospital for his daughter
Total Reduction in Taxable Estate: $105,000
Impact on Exemption: None—these payments do not count against Joe’s $13.99 million estate tax exemption or annual gift limit, because they qualify under the IRS educational and medical exclusions. Grandpa could still give each of those recipients an additional $19,000 under the annual gift exclusion without any tax consequences.
Conclusion: Gift With Caution and Professional Help
Gifting can be an effective estate tax strategy—but only when used thoughtfully and with professional guidance. Consider the loss of stepped-up basis, the asset’s appreciation potential, your own financial needs, and the stability of the recipient. For some, the risks of gifting may outweigh the benefits.
With estate tax rules changing in 2026, now is the time to review your estate plan. Consult your attorney and tax advisor to determine if gifting fits your strategy—and how to do it safely.
For more information on gifting and estate taxes, see the Gifting to Reduce Federal Estate Taxes bulletin available at farmoffice.osu.edu.
Tags: estate taxes, Gifting
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Estate taxes have been a hot topic lately, especially with the looming expiration of the Tax Cuts and Jobs Act (TCJA). The TCJA significantly increased the federal estate tax exemption, which stands at $13.99 million per person for 2025. However, if Congress does not intervene, that exemption will drop to approximately $7.2 million in 2026, reverting to pre-TCJA levels.
Estate Taxes and Farms: The Current Reality
Despite the frequent debate about estate taxes, very few farm estates actually owe them. According to the USDA, only about 0.3% of farm estates are subject to federal estate tax under the current exemption. In fact, in 2022, the USDA estimates only 87 farm estates nationwide had to pay any federal estate tax at all.
If the exemption decreases in 2026, more farms will be affected, but the overall percentage will still be relatively small. Here’s what the numbers look like:
- The percentage of all farms owing estate taxes would rise from 0.3% to 1.0%.
- Large farms (those with $1 million to $5 million in gross income) would see the biggest jump, with taxable estates increasing from 2.8% to 7.3%.
See the chart below for a full breakdown.
Why Estate Taxes Matter for Farm Families
Even though only a small percentage of farms will be affected, for those that are, estate taxes can pose a significant challenge to passing the farm on to the next generation. Many farms are asset-rich but cash-poor, meaning they have substantial land and equipment value but limited liquid assets. This can create difficulties in paying estate taxes without selling off land or assets critical to farm operations.
How to Prepare for a Potentially Lower Exemption
With the possibility of a lower estate tax exemption in 2026, farm families should take proactive steps now to review and update their estate plans. Strategies to consider include:
- Gifting Strategies: Transferring assets now while the exemption is higher can help reduce the taxable value of an estate later.
- Trust Planning: Certain trusts, such as irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs), can help manage estate tax liabilities.
- Business Entity Structuring: Using a business entity, such as an LLC, can provide tax advantages and aid in succession planning.
- Appraisal and Valuation Planning: Keeping accurate and updated valuations of farmland and business assets helps clarify estate planning needs and may offer tax-efficient structuring opportunities.
The Bottom Line
Farm families need to evaluate their potential estate tax risk now—both under current exemption levels and the possible lower exemption in 2026. If you have concerns, consult with your attorney and other key team members to determine whether updates to your estate plan are needed. Taking action now can help ensure that your farm remains in the family for generations to come.
The landscape of federal estate taxes is poised for significant change in 2026, with the potential reduction of the federal estate tax exemption on the horizon. Currently, the exemption stands at $13.61 million per person for 2024. However, without congressional intervention to extend or make permanent the current exemption, it is expected to drop to around $7 to $7.5 million, adjusted for inflation, in 2026. This looming reduction brings a sense of urgency for farmers and individuals with substantial estates to consider strategic planning to mitigate future tax liabilities.
The OSU Agricultural & Resource Law Program has released a comprehensive bulletin, “Gifting to Reduce Federal Estate Taxes”. This bulletin delves into the nuances of gifting as a viable strategy to reduce federal estate taxes. It explores various gifting options, their implications, and the potential benefits and drawbacks associated with each approach.
Types of Gifts and Their Implications
The bulletin categorizes gifts into two primary types: annual exclusion gifts and lifetime credit gifts.
- Annual Exclusion Gifts: These are gifts of up to $18,000 per person, per year, to an unlimited number of recipients. This type of gift is not subject to federal gift tax for either the giver (Giftor) or the receiver (Giftee). For example, a grandparent can gift $18,000 to each of their ten grandchildren, amounting to $180,000, without incurring any federal gift tax. This strategy is particularly effective for those slightly over the estate tax exemption threshold, as multiple small gifts can cumulatively reduce the taxable estate.
- Lifetime Credit Gifts: These are larger gifts that exceed the annual exclusion limit and count against the federal estate tax exemption. For instance, if a mother gifts a farm worth $1,018,000 to her daughter, the excess amount over $18,000 (i.e., $1,000,000) reduces the mother’s estate tax exemption. While no immediate gift tax is due, the exemption is decreased by the value of the large gift. This strategy can be advantageous for gifting appreciating assets, as future value increases occur outside the Giftor’s estate, effectively reducing potential estate tax liabilities.
Strategic Gifting to Optimize Estate Planning
The bulletin outlines several strategies to optimize estate planning through gifting:
- Annual Exclusion Gift Strategy: By consistently making annual exclusion gifts, individuals can gradually reduce their taxable estate. This method is beneficial for those with many potential gift recipients and can effectively lower estate value over time. However, for those with significantly higher estate values, this strategy may have limited impact due to the relatively small amount per gift.
- Lifetime Credit Gift Strategy: Making large lifetime credit gifts before the 2026 exemption reduction can be a powerful tool. For example, a high-net-worth individual might gift $13.62 million in 2024, capturing the higher exemption before it potentially decreases. This preemptive action can save heirs millions in future estate taxes, although it requires careful consideration of the Giftor’s financial security post-gifting.
- Appreciating Assets: Gifting assets expected to appreciate significantly can maximize the benefit of lifetime credit gifts. By transferring these assets out of the estate, future appreciation is not subject to estate taxes, providing a substantial tax-saving advantage.
Considerations and Potential Drawbacks
While gifting can offer substantial benefits, it is not without potential drawbacks. The bulletin emphasizes the importance of understanding these implications:
- Loss of Stepped-Up Basis: Gifting eliminates the possibility of a stepped-up basis at death, potentially increasing capital gains tax for the Giftee upon the sale of the gifted asset.
- Loss of Control and Income: Gifting requires relinquishing control and ownership of the asset, which can be difficult for those reliant on the income generated by the asset.
- Risk of Mismanagement: The risk of the Giftee mismanaging or losing the gifted asset to creditors is a concern, which can sometimes be mitigated through business entities or irrevocable trusts.
The OSU Agricultural & Resource Law Program’s bulletin provides valuable insights into the strategic use of gifting to reduce federal estate taxes. As the potential reduction of the estate tax exemption looms, understanding and implementing these strategies can significantly impact future tax liabilities for farmers and individuals with substantial estates. However, due to the complexity and potential consequences of gifting, it is crucial to seek professional legal and tax advice before taking action.
For a detailed discussion on gifting strategies and their implications, access the full bulletin “Gifting to Reduce Federal Estate Taxes” at farmoffice.osu.edu.
Estate taxes are receiving a lot of attention due to the impending reduction in the federal estate tax exemption in 2026. If Congress does not extend or make permanent the current estate tax exemption, the exemption in 2026 will be $5.5 million per person plus inflation. The inflation-adjusted estate tax exemption for 2026 is expected to be between $7 million and $7.5 million. The current federal estate tax exemption for 2024 is $13.61 per person.
The lower federal estate tax exemption will still be high enough for most people to avoid federal estate taxes. However, some farmers will see themselves move into the federal estate tax bracket in 2026. People who will find themselves subject to estate taxes due to the 2026 sunset provisions are exploring strategies to help reduce estate tax liability.
One such strategy that may be considered is gifting. In some situations, gifting can help reduced estate taxes. In other situations, it may have little effect and have detrimental effects on income tax strategy. This article will discuss how gifting may or may not help with estate tax liability and the implications of gifting.
Annual Gifts
One gifting strategy to help reduce estate taxes is using the annual gift exclusion. As stated above, multiple gifts of up to $18,000 can be made without tax to either party. The gifts can be money, shares in a business entity, real estate or almost any other kind of asset. The annual exclusion gift can be an effective strategy for those people who have many potential recipients for the gift and/or may be close to or just over the federal estate tax exemption. Consider the following example:
Grandma has 10 grandchildren. She calculates that she will be about $200,000 over the estate tax exemption in 2026. She gifts each grandchild $18,000 in both 2024 and 2025. The gifts allow Grandma to gift a total of $360,000.
This gift allowed Grandma to move back under the estate tax exemption and avoid estate taxes. Neither Grandma nor grandchildren will pay gift taxes on the gift. As the example shows, using the annual gift exclusion can be an excellent way to reduce or eliminate estate taxes.
The primary limitation to the annual exclusion gift strategy is that it may have limited effect for people who are significantly over the federal estate tax limit. While $18,000 is not a small amount of money to gift, it may be too small to make much of an impact on estate taxes of higher wealth people. Let’s continue the previous example with a change of facts:
Grandma’s net worth will be $2,000,000 million over the exemption in 2026.
Even though Grandma can gift $180,000 each year to her grandchildren, it will take 12 years for Grandma to gift away $2,000,000. Additionally, her net worth will likely increase each year. In fact, the increase in net worth may outpace what she is able to gift each year. While annual gifting will always help reduce potential estate taxes, this strategy may only be moderately helpful for higher wealth people.
Lifetime Credit Gift
Another strategy is to make large gifts more than the $18,000 annual exclusion gift. As discussed above, large gifts can be made without paying gift tax. However, the estate tax exemption is reduced by the amount of the gift. So, making lifetime credit gifts are offset dollar-for-dollar by a reduction in the estate tax exemption. However, this strategy can still be effective when gifting assets that are expected to appreciate in value. Gifting these assets keeps the appreciation out of the Giftor’s estate. Consider the following example:
Grandma owns the Smith Farm that sits next to town. It is currently valued at $1,000,000. She expects commercial development pressure to cause the value of the Smith Farm to increase to $3,000,000 in the next few years. Grandma decides to gift the Smith Farm to their grandchildren.
Grandma can gift the Smith Farm without paying gift taxes. Her federal estate tax exemption will be reduced by $1,000,000. So, the gift itself does not help her estate tax situation. However, when the Smith Farm increases in value by $2,000,000, that appreciation in value will be assumed by the grandchildren. Grandma has essentially been able to gift $3,000,000 out of her estate while only using up $1,000,000 of her estate tax exemption.
This strategy may not be the best strategy for assets that will have no or little appreciation. For a non-appreciating asset, the gift just comes off the estate tax exemption and does not help the estate tax situation. Again, large gifts work best with appreciating assets.
Capturing the Higher Lifetime Credit
As stated previously, the current lifetime credit gifting allowance is $13.62 million which will decrease by about one-half in 2026. So, there is an opportunity to make a very large gift now and capture the large gift allowance before it is reduced. Consider the following example:
Grandma has a net worth of $20,000,000. She is concerned she will be over the estate tax exemption limit by $13,000,000 in 2026 resulting in around $5,000,000 of estate taxes. To avoid these taxes, Grandma gifts $13,620,000 of land to her grandchildren in 2024.
In this scenario, Grandma is able to gift her entire lifetime credit which reduces her estate tax exemption is to $0. But, when the estate tax exemption is reduced to $7,000,000 in 2026, there will be no claw back of her gift. That is, her estate tax exemption will remain at $0 and the IRS will not seek to recoup any of the 2024 gift exceeding $7,000,000. So, Grandma is able to gift $13,620,000 in 2024 and there is no claw back of the extra $6,620,000 in 2026 when the exemption is reduced. Grandma’s net worth is reduced to $6,380,000, which will be subject to federal estate taxes, but the gift of $13,620,000 will not.
Obviously, this strategy only works for very high wealth individuals. The person must have enough assets to gift more than the full exemption amount and still have adequate assets remaining to support themselves. Most people do not have enough wealth to make this strategy work, but for those that do, it can be very effective.
Gifting Has Negative Tax Consequences
Gifting eliminates the opportunity of stepped-up basis at death. This important concept of stepped-up tax basis at death is a tremendous financial benefit to the beneficiary receiving the asset from the estate. Careful consideration should be given to this loss of stepped-up basis before a gifting strategy is implemented. For more information on gifting and stepped-up basis, see the Gifting Assets Prior to Death publication available at farmoffice.osu.edu.
Seek Legal and Tax Advice
Making gifts, particularly large gifts, have significant legal and tax consequences. Before implementing a gifting plan, be sure to consult with legal and tax advisors to explore all options and to understand the implications of different strategies. While gifting may seem like a simple solution to estate taxes, gifting is often complicated and has complex legal and tax consequences that should be carefully considered.
Tags: Gifting, estate taxes
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On July 26, 2023, Representatives Jimmy Panetta of California and Mike Kelly of Pennsylvania introduced legislation related to farm estate taxes. The proposed bill seeks to increase the limit on the deduction that can be taken by farmers under Section 2032A of the Internal Revenue Code (IRC). The 2032A provision in the IRC allows farmers to value their land at agricultural value, rather than fair market value. However, the current law limits the deduction to $1.16 million. This relatively small deduction can limit the usefulness of 2032A for some farm estates.
Consider the following example:
Farmer’s estate includes 500 acres with a fair market value of $5,000,000. The agricultural value, allowed by 2032A, is $4,500/acre or $2,250,000. The difference between the fair market value and the agricultural value is $2,725,000. So, by using 2032A valuation, the land value can be reduced by $2,725,000. However, 2032A limits the deduction to $1,160,000. Therefore, Farmer’s estate can actually use less than ½ the reduction in land value.
The newly introduced legislation would increase the 2032A deduction limit to the federal estate tax exemption, currently $12,900,000. Applying the proposed legislation to the above scenario, Farmer’s estate would be able to deduct the entire $2,725,000.
The farm value of farmland is determined by a formula included in the IRC. The value is the net cash rent of comparable land less real estate taxes divided by the Farm Credit System Bank interest rate, which is 4.57% for a 2022 Ohio estate. Let’s assume the fair market cash rent for a farm is $220/acre less $50/acre for taxes. Dividing by the interest rate, we get a value of $3,720/acre. The 2032A rate (farm value) is usually 1/3 to ½ of the fair market value.
If we use the $3,720 as the farm value and $10,000/acre for fair market value, 2032A reduces the value of the farmland by $6,280/acre. Dividing the per acre savings into the 2032A limit of $1,160,000 results in 185 acres. So, a reasonable estimate is that the 2032A limit only allows farmers to apply the 2032A special valuation to about 185 acres (assuming $220 rent and $10,000 FMV). Conversely, if the 2032A limit is increased to $12,900,000, the farm value could be used on over 2,000 acres. Increasing the 2032A exemption limit to $12,900,000 could save as much as $4,696,000 in estate taxes for some farm estate.
It is important to note that 2032A is only needed by farmers whose estate value will exceed the federal estate tax limit. For example, a farmer that died today with a net worth of $12,900,000 or less would owe no estate tax and thus would not need to take the 2032A deduction. According to the USDA, of the approximately 31,000 principal farm operators who died in 2020, only 50 (0.16%) owed estate taxes. With the current high estate tax exemption, less than 1% of farmers owe federal estate taxes and thus the 2032A limit is not an issue for the vast majority of farmers.
Unfortunately, this could change soon. In 2026, the federal estate tax exemption is scheduled to be reduced to around $7,500,000. We will not know the exact number until 2026 because of adjustment for inflation, but it will be somewhere around ½ of what it is now. Congress can extend the current, higher exemption or make it permanent, but no one seems to know the likelihood of that happening at this point. If the federal estate tax exemption does come back down in 2026, and with the increases in land prices the last few years, 2032A may become needed by many more farm estates.
Let’s take a look at how 2032A would play out in 2026. Consider the following scenario:
Farmer dies in 2026 and the federal estate tax exemption is $7,500,000. His net worth is $10,000,000 with $7,000,000 in farmland. The estate is $2,500,000 over the estate tax exemption limit which would result in $1,000,000 in estate taxes. If the 2032A exemption remains at $1,160,000, we can further reduce the estate by that amount, leaving $1,340,000 over and $536,000 of tax liability. If the newly proposed 2032A legislation is passed, the Farmer’s estate will be able to deduct at least $2,500,000 using 2032A, leaving Farmer’s estate with $0 tax liability.
As the scenarios and discussion shows, increasing the 2032A exemption limit will help farm estates, especially if the estate tax exemption is reduced in 2026. The proposed legislation has been introduced in the prior two Congresses and both times did not make it out of the House Ways and Means Committee. We will keep you updated on the status of this legislation and if it begins to make its way through Congress.
