A lot of us tend to think we have plenty of time when it comes to dealing with our estate and succession planning. Talking about our own deaths and our wishes with family members is not many people’s idea of a good time.
So, if you’ve been putting off having those tough conversations, here’s something to spur you along: The estate exemption is sunsetting on Dec. 31, 2025.
But what does that mean to you?
In 2023, the first $12.92 million (or $25.84 million for couples) of an estate is exempt from federal estate tax, and the lifetime gift exclusion is also $12.92 million. So, let’s say you give your children some of your land or other assets or that you leave that to them when you die. If those assets are valued at less than the numbers listed above, they won’t face a federal income tax bill related to those assets.
But starting in 2026, the amount that’s exempt is expected to drop back to about $7 million.
Those numbers may seem high. But for farmers and ranchers, you have to consider how much your land is worth as part of your estate. With real estate values continuing to increase by leaps and bounds, you can hit those numbers pretty quickly.
If your estate’s value exceeds those amounts, your heirs could be looking at paying 40% of everything above those numbers now and 45% in 2026.
Fortunately, there are planning techniques you can use to help transition your family business and lessen the impact of the estate tax. These techniques can also help you with succession planning so you have family members in place who can continue your heritage.
One example is to form an entity with guidance from your attorney to hold the land and then gift ownership interests within the entity. Entities most commonly used are Limited Partnerships, Family Limited Partnerships, and Limited Liability Companies. Depending on the operating agreement of the entity, a business valuation analyst can calculate discounts on the entity to help lower the values gifted, which ultimately lowers the estate value.
For this technique to work, you do need a valid business purpose that’s beyond just avoiding taxes. Some valid business purposes include protecting the property for your descendants, positioning successor managers, sharing management duties, insulating assets from creditors, family disputes, or divorce, and wanting to keep the LLC operations as a single unit without breaking up the land between children or beneficiaries.
In addition to succession planning, which Casey Peterson, LTD offers, we also suggest a business valuation. When you work with one of our Certified Valuation Analysts, you’ll get a clear picture of the value of your farm or ranch operations.
If you have questions about your estate or want to learn more about a business valuation, reach out to us.