Federal estate tax basics
The federal estate tax is essentially a tax on a person’s right to transfer property at death. If a person’s taxable estate is valued over the exemption amount set by Congress, the person’s estate is required to pay taxes on that amount within nine months of death.
The exemption is based upon the value of a person’s “taxable estate,” which is essentially the market value of their assets less certain allowable expenses and deductions such as mortgages, funeral expenses and estate administration costs.
As recently as the early 2000s, the estate tax exemption was as low as $1 million per person. Certainly, given the value of agricultural land and farm assets, this had the potential to impact a large number of agricultural producers.
In 2013, the exemption level was raised significantly to $5 million per individual, which would then be increased for inflation in following years. Studies show this has greatly decreased the number of persons facing estate tax liability. According to one estate tax lawyer, in 2016, only 682 taxable estates contained any farm assets at all.
There are a number of estate planning tools available to help someone avoid estate tax liability even if the gross estate may be worth more than the exemption amount.
2018 exemptions
For people dying in 2017, the federal estate tax exemption was $5.49 million per person. In 2018, that amount will be adjusted for inflation and increase to $5.6 million per person. This means in 2018, a couple may transfer $11.2 million without facing any estate tax liability. For persons with estates valued at more than the exemption, a 40 percent tax is imposed on the amount above the exemption level.
For example, let’s calculate the estate tax liability for a rancher with a taxable estate worth $5.5 million in 2017 and in 2018. For 2017, the exemption is $5.49 million, meaning the rancher’s estate is $100,000 over that amount. At a 40 percent tax rate, his tax liability would be $40,000. In 2018, however, his estate value would fall below the $5.6 million threshold, and he would owe no estate tax.
Proposed legislative changes
In their current iterations, both the House and Senate tax reform bills would make important changes to the federal estate tax. Both the House and Senate bills would double the exclusion amount, meaning an individual would have an exemption of $11.2 million in assets, and a couple would be able to pass over $22 million tax-free.
Additionally, the House bill would repeal the estate tax altogether in 2024, while the Senate proposal does not contain such language.
Takeaways
It has been said the only certainties in life are death and taxes. In light of this, everyone should be aware of the current law regarding the federal estate tax and should keep an eye on tax reform efforts to determine if any significant changes are made.
People with estates that may be close to the current exemption should visit with their attorney and accountant to determine what steps may be available to help minimize the estate tax liability when property is to be transferred at death. 
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Tiffany Dowell Lashmet
- Assistant Professor and Extension Specialist – Agricultural Law
- Texas A&M AgriLife Extension Service
- Email Tiffany Dowell Lashmet
