Married Farm Couples Exempt From Estate Tax on $11 Million

• November 3, 2016
• Paul Neiffer

The IRS just announced the inflation adjusted amounts for various tax items.  One of the major ones that farmers care about is the amount of estate value that is exempt from estate taxes.  For 2016, this value was $5.45 million per person or $10.9 million for a married couple.  For 2017, the amount increases to $5.49 million or $10.98 million per couple.  I am rounding this to $11 million.

The annual gift limit remains at $14,000.  Within a year or two it will jump to $15,000 (it only jumps once it goes over a $1,000 level).  There is always some confusion on how the annual exclusion works.  Here are some general rules:

• Every person can give away $14,000 to as many people as they like during a year.  They do not need to be related to the person.
• If they give away more than $14,000, they are then required to file a gift tax return, but no gift tax is due.  Also, if one spouse gives more than $14,000 to person, they can elect for the other spouse to have “gifted” half of that amount.  This may drop them under the $14,000 level, however, they would need to file a gift tax return to make this election.
• No gift tax is due unless the total amount of gifts (including all past gifts) exceeds the lifetime exemption amount ($5.49 million next year).  Once you go over this level, you will owe gift tax of 40% on the excess.
• Gifts of cash, publicly traded stocks and bonds, etc. are valued at fair market value.  Gifts of partial interests in farm entities are valued at “fair market value”.  However, this value can be less than the value of the underlying assets.  This discount has historically ranged in the 25% to 40% range (or higher in some cases), however, the IRS has proposed reducing the amount of discount that farmers can take.  If you are over the $5.49 million value limit, you should discuss with your tax advisor doing major gifts before year-end.
• If a spouse passed away and their value was less than the estate exemption level, the surviving spouse can make a portability election to bring that excess over and use on their gift/estate tax return.
• As an example, suppose Paul Bunyon passed away with a net worth of $2 million in January, 2017.  The excess $3.49 million not used in his estate can be ported over to Patty Bunyon (his lovely wife of 35 years) and added to her $5.49 million.  She is allowed to make a gift of $3.49 million out of Paul’s ported over amount.  At that point, she can marry a new spouse and they then could be worth $11.98 million and owe no estate tax.

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