Editors Note: Check out the first in this series here!
In the past, estate taxes were generally considered a barrier to the preservation of family farms. But over the past several years changes in estate tax laws at the federal level have improved things. The estate tax was set at more than $5 million and is tied to inflation. The $5.25 million level per individual does remove the federal estate tax threat from the vast majority of family size farms. But while this is something to celebrate, there remains a sizable tax threat if one’s farm is located in a number of states that tax estates and inheritance amounts. If there is one rule among the various states that tax estates, that rule would be there is no consistent rule.
Here’s a table listing state estate taxes for various states. Please note that there are some states that not only tax estates but also tax amounts inherited. The amounts that are exempt from estate taxes, range from having the total amount of an estate taxed in Iowa and Pennsylvania to an exemption of $5.25 million in Delaware and Hawaii, who have tied their estate tax to the federal level. The maximum tax rate ranges from 9.5% in Tennessee to 18% in Nebraska. Therefore, depending upon what state you reside in, family farms need to be aware that they may be subject to substantial unexpected estate taxes, especially if they thought the federal tax has been fixed.
What is not included in the above table are variations in exemptions in each state’s tax structure. Generally, most states exempt all estates that are transferred to a spouse. The thinking is that the state will likely collect a tax on the exempt amount when the spouse passes away and likely it would be taxed at a higher rate. Some states have additional exemptions. For example, Pennsylvania has an exemption for farmland that remains in farming for a period of time after the transfer date. Nearly all of the states have a variable estate tax rate, with the tax rate increasing as the taxable estate increases in size. Some of the states also have different rates depending on who is inheriting the estate, with lower rates for direct lineal descendents and higher rates for non-family heirs.
There are other factors that are calculated in to determining the level or taxable estate. Some states give credits for federal taxes. Other states take gifting into account and adjust the value of the estate accordingly. Some other states may exempt life insurance payable to a life insurance trust while some consider the insurance as part of the taxable estate. Some states may provide exemptions or deductions of certain gifts or to designated groups that are or are not allowed by the federal level.
The bottom line is that individuals need to check the laws in their state to know what taxes to which their estate may be subject. The calculation of the taxable estate usually requires accounting and legal assistance. Remember this point, estate taxes payable to the state governments can be substantial, especially when unexpected. For instance a family farm estate that has a net value of $3 million, in a state that has a $2 million exemption would have $1 million of the estate subject to taxes. IF the tax rate is 6%, the estate would owe $60,000 in taxes to the respective state. This is not a small amount, especially for most farm estates that tend to have lots of assets but little available cash. So farmers should be aware of their taxable situation when making estate plans.