Saving Your Land by Sharing the Tax Exclusion

Margaret-Menicucci

Estate planning is easy to postpone.  You know it is important, but it can also be hard to discuss.  There are Texas-sized reasons, however, for a rural landowner to develop (or re-visit) an estate plan.  The first reason is rising land values.  Given the changes in the Texas economy, your farm or ranch may now cause your estate to be taxable, even though you do not have liquid assets like cash accounts to pay that bill.  This could leave your children in the difficult position of having to sell part of the land to satisfy the estate tax obligation.  The second reason is that Congress has provided tools that help you manage and even avoid that estate tax liability, but you have to follow specific steps to benefit from them.  Those tools are the high individual estate tax exclusion amount of $5,340,000 per person in 2014 – and “portability” of that exclusion between spouses.  Portability means that in some circumstances, spouses can share the unused portion of their estate tax exclusion.  Careful use of a will and of the portability rules can save your land for future generations to enjoy.

Let’s look at an example of married landowners Ann and Arthur.  Arthur dies giving all of their property to Ann through his will. The unlimited marital deduction applies, making Arthur’s taxable estate zero (or near zero if he gave some other, smaller gifts to children).  No tax liability means that Ann does not have to sell a portion of the land to generate cash. Additionally, all or most of Arthur’s estate tax exclusion went unused.  That exclusion becomes “portable” meaning it can be shared with Ann. The executor of the estate must file a form 706 with the IRS within nine months of Arthur’s death to successfully share the exclusion with Ann.  When Ann dies, through her will she passes the land to their children.  There is no marital deduction this time, so the individual estate tax exclusion applies.  With portability, Ann’s exclusion is up to $10,680,000!

Picture1The calculations in the box to the left show the tax consequences when Ann dies under two scenarios – 1) no portability of Arthur’s exclusion and 2) portability, because the executor timely filed the form 706. To make it easy to follow, we assumed that at the time of Ann’s death, the ranch was worth $12 million and the estate had $1 million in cash.

1 Comment

  1. 20/20 Tax Resolution
    November 26, 2014

    Very good information. Lucky me I came across your blog by
    chance (stumbleupon). I have saved as a favorite for later!

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