Gifting Strategies to Reduce Federal Estate Taxes: A Guide for Farmers

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.

1. 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.
2. 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:

1. 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.
2. 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.
3. 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.