Planning for end-of-life costs and expenses
A common misconception in farm estate and succession planning is that an estate plan is only used after an individual passes away. In fact, a comprehensive estate plan should also provide for possible long-term care needs, dictate health care directives, and designate a trusted individual to oversee desired funeral arrangements. Determining these arrangements in advance can lessen the burden on loved ones after death. Additionally, proper estate planning can help farm families manage other potential costs such as inheritance taxes or estate taxes.
An inheritance tax is a tax on an individual bequest to a beneficiary. Currently, six states impose an inheritance tax. Generally, state laws exempt the deceased’s spouse as well as lineal descendants or ascendants from paying an inheritance tax. Iowa is phasing out its inheritance tax which will end on January 1, 2025. There is no federal inheritance tax.
The federal estate tax, on the other hand, is a tax imposed on the value of an estate that exceeds the Unified Estate and Gift Tax Credit. Under the current federal tax system, the value of assets gifted during life is combined with the value of a taxable estate at death to determine the amount, if any, of gift and estate taxes due. In 2023, the basic exclusion is $12.92 million per person ($25.84 million per married couples). Because of this historically high exclusion, very few farm estates (approximately .16%) are subject to gift and estate taxes1/.
Example: A single individual dies in 2023 with a taxable estate of $13.92 million. The estate would only owe taxes on $1 million ($13.92 million – $12.92 million).
In 2026, the Unified Gift and Estate Tax Credit will revert to $5 million, adjusted for inflation. Because Congress may choose to increase or decrease the exemption beforehand, farmers must stay informed and work closely with their tax advisor and lawyer.
Chapters seven and eight of the Estate and Succession Planning for the Farm workbook have additional information on end-of-life costs and expenses.
This bi-monthly webinar series is part of a multi-year project led by the extension farm management team’s women in ag program to better understand and meet the educational needs of women farmland owners. The series is offered through collaborations with Iowa State’s Center for Agricultural Law and Taxation, Water Quality Initiative, and the Department of Economics. The project is bringing comprehensive land management information to audiences of women farmland owners.
Women Managing Farmland programs and resources are financially supported by a USDA National Institute of Food and Agriculture - Critical Agriculture Research and Education grant (2021-68008-34180) and a Farm Credit Services of America gift. For information on Women Managing Farmland courses, visit the Women in Ag website.
1/ Tia McDonald and Ron Durst, Less Than 1 Percent of Farm Estates Owed Federal Estate Taxes in 2020.
Kitt Tovar Jensen, staff attorney, Center for Agricultural Law and Taxation, Beginning Farmer Center coordinator, 515-294-5608, email@example.com