Editor’s Note: This is the first installment in a three-part series focused on how to protect your estate given the sunset currently written into the Tax Cuts and Jobs Act of 2018.

Who needs to be concerned about the tax law changes at the end of 2025?

My quick answer is all of us. What’s estimated to have the greatest net effect on farm household budgets is the potential return to higher income tax rates and the loss of deductions and write-offs from depreciation.

However, much of what you’ll start hearing will be on potential estate tax changes. Relatively few family farms are subject to federal estate taxes under current laws. This could change too, and the current federal estate tax rate of 40% is one everyone wants to avoid.

Estate tax exemptions

In 2025, the federal estate tax exemption is estimated to be near $14 million per individual (or almost $28 million for a married couple) under the Tax Cuts and Jobs Act, which was enacted in 2018. These exemptions are scheduled to sunset to pre-2018 levels at the end of 2025 unless Congress votes to extend them. Yes, it takes both a vote of Congress and approval from the President to extend our current laws.

Unified Credit/Estate Tax Exemption, 2015-2030. Source: Internal Revenue Service

If current tax laws are allowed to sunset, the current exemptions described above likely would be cut in half, which being the exemption down to about $7 million per individual or around $14 million for a married couple (adjusted for inflation). This potential tax sunset, mixed in with stronger farmland prices, could change the current estate tax landscape and affect many more family farms.

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Use it now or lose it?

This will be a recurring debate over the next 12 to 14 months. Exactly what does this mean? Let’s do a quick review of our current gifting laws.

Annual gift exclusion. Most people are familiar with the annual gift exclusion we’re allowed, which is estimated to be $19,000 per person in 2025. This is tax-free and does not require any reporting to IRS.

Larger gifts. The $14 million estate tax exemption noted above can also be used to make larger gifts during your lifetime. So technically a married couple can transfer up to $28 million of assets in 2025, also tax-free. They must file a gift tax 709 form to notify the IRS they are using their lifetime exemption now and this will come off what they have available at death.

With the threat of these exemptions being slashed in half, some will consider using some of their lifetime gift exemption before the end of 2025. It’s the dilemma of whether to “use it now before I lose it.”

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Where to start

You can’t manage what you can’t measure, so my first piece of advice is to do an accurate assessment of your current estate.

Remember, most estate practitioners will rely on an unbiased appraisal to value your estate for IRS purposes. These appraisals have crept up and surprised folks who have kept their land equity low on the balance sheet. Don’t take this lightly, as an unexpected tax of 40% could cause other problems if your estate does not have the liquidity to pay it.

Get started now

I was first introduced to estate and succession planning back in 2011 when my parents were motivated by another looming estate tax sunset at the end of 2012. This sunset was not enacted, but the planning they did then helped secure the future of our family farm today. If the looming tax law changes are a motivator for you too, then I recommend you get started now. Fewer capable attorneys and tax professionals will be available as we approach the end of 2025.

In part two of this series, I will share some potential strategies and how to “freeze” the value of your estate. Please give it a read, as maybe you should consider enacting one of these strategies by the end of this year.

Downey has been consulting with farmers, landowners and their advisors for nearly 25 years. He is a farm business coach and transition consultant with UnCommon Farms. Reach Mike at [email protected].

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