Navigating Government Regulations and Tax Implications

The Silent Threat: Estate Taxes on Agricultural Land

For farmers and ranchers, estate taxes are a quiet but very real and looming threat. They do not strike during your lifetime, but when your estate passes on. And for those whose operations have appreciated significantly in value, the tax bill can be devastating. That is, unless agricultural tax planning is already part of your long-term strategy.

Let us get the good news out of the way first: Idaho does not impose an estate or inheritance tax. That is a tremendous benefit. But the federal government does, and this is where careful planning becomes all the more essential.

The federal exemption amount is subject to change and indexed to inflation. Anything above the federal threshold is taxed at a rate of up to 40%.

For many ranchers, skyrocketing land values mean their estate could easily exceed that exemption, especially once they factor in livestock, equipment, and any investment or business holdings.

Several tools and strategies can significantly reduce or eliminate federal estate tax exposure if used properly. Let us explore a few options you may wish to consider.

One option is called “portability.” Portability allows a surviving spouse to use any unused estate tax exemption from their deceased spouse. This means a married couple can effectively pass double the federal exemption amount tax-free. This, too, is subject to the tax payer’s lifetime gift history and other exclusions.

However, portability must be claimed within strict timelines through IRS filings, usually within nine months of death. This makes professional and experienced guidance essential.

Another option is known as the Special Use Valuation (IRC Section 2032A).  This rule allows agricultural property to be valued based on its agricultural use rather than its highest market value, such as a subdivision or commercial use. Using this valuation can dramatically reduce the assessed value for estate tax purposes.

Realize that eligibility rules are relatively strict, and the heirs must continue to use the land in agriculture for a defined period.

For families concerned about exposure to both taxes and creditor claims or about controlling who inherits and how, placing land into an irrevocable trust can provide both tax benefits and long-term protection. Once assets are transferred, they are generally removed from the taxable estate. Our firm has drafted irrevocable trusts for ranching and farming families with great success in matching our clients’ estate and tax planning goals with a system that carry out their wishes and carry on the family operation without a devastating tax hit.

It is important to remember that estate tax exemptions are not fixed in stone. Congress adjusts these figures, and new laws can dramatically shift what is taxed and how. This is why it is important to keep up with the current year’s exemption limits. As such, I recommend reviewing your estate plan every year as well as when major legislative changes occur, whichever occurs first. It is also wise to engage a tax advisor or estate planning attorney immediately after the death of a spouse or parent to leverage time-sensitive strategies like portability or special use valuation.

I worked with a ranching family in Idaho who faced a potential estate tax due to ownership of land in Oregon. While this family’s operation was modest, nothing extravagant, it was valuable enough to raise real concerns about estate taxes and legal exposure. They took a simple yet highly effective approach that made all the difference.

First, they placed the Oregon land into an Idaho limited liability company, which company was owned by an irrevocable trust, shielding it from potential lawsuits and from heirs who were not meant to manage or benefit from the land. They also proactively addressed long-term care and Medicaid planning, ensuring the ranch would not have to be sold off later to cover elder care costs. And by avoiding probate, they simplified the estate’s distribution while steering clear of government entanglements.

The result? Their operation continued seamlessly, with both their values and their land fully preserved.