2017 Tax Reform - Estate Tax Focus
As part of the 2017 Tax Reform Bill, the estate tax will remain in place and not be repealed. However, the threshold for an estate to qualify was doubled from $5.49 million currently to about $11 million for individuals. For a couple, the new bill allows for a total estate value of $22.4 million exempted from tax. This should eliminate the concern of a federal estate tax for the majority of Americans.
Federal estate tax has been a major issue for landowners, including forest landowners, farmers, and ranchers. Many of these landowners have grown their land ownership over many decades or even multiple generations into successful family businesses. Timberland, farmland, and ranchland is considered a highly appreciated asset, meaning the fair market value of the property at the date of death is typically much greater than the basis or original purchase price. This is one of the reasons investment in land real estate is so attractive and it is a wealth creator; however, it can create challenges when the asset is being passed from one generation to the next. The value of a decedent’s real estate can greatly increase the value of their estate.
Under prior law, estates with a total value of exceeding $5.49 million are subject to a 40% estate tax on the amount over the threshold. For a quick example, if an individual owns a 2,500-acre tree farm and the fair market value at the date of death is $6 million (we will assume for simplicity this is the their only asset, which is unlikely in reality) the estate would exceed the threshold by $501,000 and the surviving spouse or heirs would potentially owe the federal government $200,000 (40%) in estate taxes. If they did not have liquid assets they would likely have to sell part of their ownership or timber to pay the estate taxes owed. Spouses can each get their own exemption; therefore, a couple could be able to transfer in total nearly $11 million- tax free under prior law to their heirs – this amount has doubled.
The prior law also allowed for portability meaning that the first deceased spouse’s exemption amount all or in part can be transferred to the surviving spouse for use in their estate when they pass. This can be beneficial if the value of the estate increases from the time of the first death to the second spouse, allowing for added exemption. So in this example, if an estate was worth $2 million at the time of the death of the first spouse, no federal estate tax would be owed, and the surviving spouse could elect on the tax return of the decedent to port the balance of $3.49 million and be able to use that in addition to their $5.49 million for a total exemption of $8.98 million at the time of the second spouse’s death.
The federal gift tax is also tied to the estate tax – individuals must keep track of the amounts gifted during their lifetime that exceed $14,000 per year per individual. Those amounts in excess of $14,000 per year per individual reduce the estate tax exemption amount at the time of death; this is called the lifetime estate/gift tax exemption. So for example, if a parent had gifted a child $5 million in value of assets during their lifetime, then they would only have $549,000 in exemption remaining for use in the settlement of their estate, any estate value over that amount could be subject to the 40% estate tax under prior law.
We emphasize these major provisions in the estate tax law to make it obvious that tax planning is important. It will take time before the new federal tax bill is fully understood. Estate taxes can still apply at the state level. As of 2016, thirteen states had estate tax, four had inheritance tax, and two of those states had both.
Landowners should discuss estate planning with their tax advisors, estate attorneys, and consulting foresters to ensure they can minimize their estate tax for their spouse and their heirs. These laws change fairly often so it is important that this is managed on an ongoing basis to stay current. Pristine Property can assist with many of the requirements needed for estate planning and settlement, including timber inventories, timber appraisals, land appraisals, timber basis establishment, forest management planning, and timber and/or land sales. Our goal is to be a valued team member in the preservation and continuity of our client’s land legacies. We would appreciate the opportunity to become one of your trusted advisors for your land management needs.