Washington estate taxes: The farm exemption

According to the most recent census from the U.S. Department of Agriculture, one-third of America’s 3.4 million farmers are over the age of 65. This statistic might not come as a surprise when you consider the demographics of your local farming neighborhood or perhaps even the age on your own driver’s license. Over the next decade, there will be a large wave of farmer retirements and farm transitions expected, with an entire generation of baby boomers handing over the tractor keys. And while we all hope for a long, healthy retirement, it is never too early to begin thinking about your estate and developing a plan to minimize the impact of estate taxes upon death. 

Federal estate taxes

The 2024 federal estate tax exemption is currently at $13.61 million per person or $27.22 million per couple (adjusted annually for inflation). With this generous exemption, federal estate taxes have generally not been a concern for most dryland ag producers in the Pacific Northwest. After 2025, the federal exemption is slated to drop to $5 million per person ($10 million per couple), adjusted for inflation. The potential impact on farmland owners is certainly more encompassing than present federal estate tax laws. It is possible that the current exemption amount may be extended, depending on the political climate in Washington, D.C., and the outcome of the 2024 election. 

State estate taxes

Washington state’s estate tax is of far greater concern, and it can have a significant and far-reaching impact on our ag producers in certain situations. The Washington state estate tax exemption is $2.193 million or $4.386 million per couple. With land values rising considerably in recent years, it is quite possible to have a taxable estate value greater than the state exemption, which is currently not indexed for inflation. Fortunately, a Washington state ag exemption exists if you meet certain criteria. Three of the most common hurdles are: 

• More than 50% of your total estate value must be farm assets. This includes farmland, farm buildings, irrigation/farm equipment, and other farm assets.
• At least 25% of the overall estate value must be agricultural real property. 
• The decedent or decedent’s heir must be actively farming for five years out of an eight year-period immediately prior to death. Assume a retired farmer has $6 million in farm assets and $1 million in other assets. His son is actively farming the ground. He qualifies for the ag exemption, allowing the $6 million in farm assets to be excluded from his estate value for purposes of the state estate tax. The estate value of $1 million is now below the $2.193 state exclusion amount, and no state estate tax is owed.

Material participation: caveats 

But what if you don’t have an heir farming the land? For retired farmers who rent out their ground, this can sometimes create estate planning challenges. To meet the actively farming criteria for the ag exemption, one must show “material participation” on the farm. Clearly, a cash rental agreement with a third-party tenant would not be considered material participation. Crop share leases are a grey area in terms of meeting material participation requirements. Facts and circumstances are different in every situation. Although there is debate, a qualified attorney may be able to draft a crop share lease to properly defend the requirements.

Other remedies

In the event that the ag exemption is not available, gifting (transferring assets prior to death) is an option to reduce the estate value. Washington state does not have a state gift tax, making gifting a powerful tool in the arsenal when your estate value is over the state exemption amount. A qualified attorney and tax professional can assist with navigating the complexities of gifting and estate planning. While it can seem overwhelming, it is well worth the exercise to map out your estate value now, even if you think you are under the exemption amounts. Farmland values, real estate values, retirement funds, and other investments can add up quickly, particularly in inflationary times. Proactive estate planning with a farm tax professional is vital. They can help you establish the value of your current estate and put a plan into motion to minimize the impact of estate taxes down the road.  

Larissa Zeiler is a CPA with Leffel, Otis & Warwick, P.S. and works out of the firm’s Odessa, Wash., office. She was raised on an Eastern Washington wheat farm and enjoys advising farm families and ag businesses. For information, visit low.cpa.