Tax Planning

Gifting to Manage Estate Taxes

By: Robert Moore, OSU Extension

The federal estate tax exemption is set to drop dramatically in 2026—from $13.99 million in 2025 to an estimated $7–$7.5 million per person. For some farm families, this shift could result in significant estate tax exposure. While most estates won’t exceed the new limit, some farmers, especially those with high-value farmland or appreciating assets, will find themselves suddenly at risk of federal estate taxes.

Gifting is one strategy to reduce the size of your taxable estate, but it’s not always simple or risk-free. Let’s explore when gifting can help, when it might not, and what to watch out for.

Two Types of Gifts

There are two main gifting categories under federal law:

  • Annual Exclusion Gifts – In 2025, you can gift up to $19,000 per recipient ($38,000 for couples) annually without using any of your lifetime exemption.
  • Lifetime Credit Gifts – Larger gifts are allowed, but they reduce your lifetime estate tax exemption.  The lifetime estate tax exemption is the amount of wealth that the IRS exempts from estate taxes.  The exemption can be used at death, gifted away during life, or a combination of the two.

Example: If a parent gifts a $1,019,000 farm to a child, the first $19,000 is exempt from taxes and does not reduce the parent’s estate tax exemption.  The remaining $1,000,000 reduces the parent’s lifetime estate tax exemption from $13.99 million to $12.99 million.

Gifting Strategies That Work

1. Annual Exclusion Gifts

If you’re just slightly over the expected 2026 exemption, annual gifts can move you back under the limit.

Example: A grandparent with 10 grandchildren can gift $190,000 per year. Over 2 years, that’s $380,000—enough to reduce a modest estate and eliminate taxes.

But for high-net-worth individuals, $19,000 per person may be too little to make a significant impact.

2. Lifetime Gifts of Appreciating Assets

Large gifts don’t directly reduce estate tax liability (since they reduce your exemption), but they remove future appreciation from your estate.

Example: If you gift farmland worth $1M that later appreciates to $3M, only $1M is deducted from your estate tax exemption — the $2M in appreciation escapes estate taxation entirely.

Potential Downsides of Gifting

  • No Stepped-Up Basis.  Gifting assets during life means recipients take your original tax basis, not the stepped-up value at death—potentially increasing future capital gains taxes.
  • Loss of Control & Income.  You must fully give up ownership and control. Gifting income-producing property could impact your financial security.
  • Risk of Financial Mismanagement.  If a gifted asset is lost to debt, lawsuits, or divorce, it’s gone. One solution? Use an irrevocable trust to hold the gift—this protects assets while still benefiting your heirs.

Another Strategy: Pay Directly for Education & Medical Expenses

The IRS allows unlimited direct payments of tuition or medical bills without using your exemption. But payments must go straight to the provider, not to the individual.

Example: Grandpa has a $9 million estate and wants to reduce its size before the federal estate tax exemption drops in 2026. He has four grandchildren in college and a daughter who recently underwent surgery.

Grandpa pays the following directly:

  • $20,000 in tuition for each grandchild (4 x $20,000 = $80,000) directly to their universities
  • $25,000 in hospital bills paid  directly to the hospital for his daughter

Total Reduction in Taxable Estate: $105,000

Impact on Exemption: None—these payments do not count against Joe’s $13.99 million estate tax exemption or annual gift limit, because they qualify under the IRS educational and medical exclusions.  Grandpa could still give each of those recipients an additional $19,000 under the annual gift exclusion without any tax consequences.

Conclusion: Gift With Caution and Professional Help

Gifting can be an effective estate tax strategy—but only when used thoughtfully and with professional guidance. Consider the loss of stepped-up basis, the asset’s appreciation potential, your own financial needs, and the stability of the recipient. For some, the risks of gifting may outweigh the benefits.

With estate tax rules changing in 2026, now is the time to review your estate plan. Consult your attorney and tax advisor to determine if gifting fits your strategy—and how to do it safely.

For more information on gifting and estate taxes, see the Gifting to Reduce Federal Estate Taxes bulletin available at farmoffice.osu.edu.

How Many Farms Pay Estate Taxes?

By: Robert Moore, OSU Extension

Estate taxes have been a hot topic lately, especially with the looming expiration of the Tax Cuts and Jobs Act (TCJA). The TCJA significantly increased the federal estate tax exemption, which stands at $13.99 million per person for 2025. However, if Congress does not intervene, that exemption will drop to approximately $7.2 million in 2026, reverting to pre-TCJA levels.

Estate Taxes and Farms: The Current Reality

Despite the frequent debate about estate taxes, very few farm estates actually owe them. According to the USDA, only about 0.3% of farm estates are subject to federal estate tax under the current exemption. In fact, in 2022, the USDA estimates only 87 farm estates nationwide had to pay any federal estate tax at all.

If the exemption decreases in 2026, more farms will be affected, but the overall percentage will still be relatively small. Here’s what the numbers look like:

  • The percentage of all farms owing estate taxes would rise from 0.3% to 1.0%.
  • Large farms (those with $1 million to $5 million in gross income) would see the biggest jump, with taxable estates increasing from 2.8% to 7.3%.

See the chart below for a full breakdown.

Why Estate Taxes Matter for Farm Families

Even though only a small percentage of farms will be affected, for those that are, estate taxes can pose a significant challenge to passing the farm on to the next generation. Many farms are asset-rich but cash-poor, meaning they have substantial land and equipment value but limited liquid assets. This can create difficulties in paying estate taxes without selling off land or assets critical to farm operations.

How to Prepare for a Potentially Lower Exemption

With the possibility of a lower estate tax exemption in 2026, farm families should take proactive steps now to review and update their estate plans. Strategies to consider include:

  • Gifting Strategies: Transferring assets now while the exemption is higher can help reduce the taxable value of an estate later.
  • Trust Planning: Certain trusts, such as irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs), can help manage estate tax liabilities.
  • Business Entity Structuring: Using a business entity, such as an LLC, can provide tax advantages and aid in succession planning.
  • Appraisal and Valuation Planning: Keeping accurate and updated valuations of farmland and business assets helps clarify estate planning needs and may offer tax-efficient structuring opportunities.

The Bottom Line

Farm families need to evaluate their potential estate tax risk now—both under current exemption levels and the possible lower exemption in 2026. If you have concerns, consult with your attorney and other key team members to determine whether updates to your estate plan are needed. Taking action now can help ensure that your farm remains in the family for generations to come.

Education and medical expenses are exempt from gifting rules

By: Robert Moore, OSU Extension

Gifting can be an important part of a farm transition plan but it is important to understand the tax implications of gifting.  Taxable gifts refer to the total value of gifts given to others during a calendar year, which may be subject to gift tax under the U.S. tax code.  These gifts can include various types of property, money, or assets.  The determination of taxable gifts considers the fair market value of the transferred assets and any applicable exclusions or deductions provided by the tax code.  Currently, an individual may gift up to $17,000 each year to an unlimited number of people.  These annual exclusion gifts are not subject to gift tax.  Gifts made in excess of $17,000 are either subject to gift tax or reduce the lifetime gift exclusion by the amount of the excess gift.  For a detailed discussion of gifting, see the Gifting Assets Prior to Death bulletin at farmoffice.osu.edu. 

In addition to direct gifts, the payment of a bill or expense on behalf of someone else is usually considered a gift.  However, there are two specific exceptions.  The IRS allows education expenses and medical expenses to be paid for someone without being considered a gift.  These exemptions may present opportunities for those who are limited by the $17,000 annual gift limit.

Education Expenses

Paying tuition directly to a school is not considered a taxable gift.  There are two important points to remember regarding tuition payment.  The tuition must be paid directly to the institution, the payment cannot go directly to the student.  Second, the exclusion applies only to tuition payments.  Other school-related expenses like books, supplies, and room and board costs are not eligible for this exclusion.

Consider the following example:  

Dale has a grandchild who attends Harvard.  The tuition at Harvard is very expensive and Dale would like to help his grandchild.  Dale sends a check to Harvard for $50,000 to be applied to tuition.  The $50,000 that Dale paid for his grandchild’s tuition is not considered a gift and therefore does not count toward the $17,000 annual exclusion gift.  Dale could still gift up to $17,000 directly to the grandchild and still not exceed the annual gift exclusion.   

Medical Care

Payments that qualify for the medical exclusion are those made directly to a healthcare provider, medical institution, or medical insurance company for someone’s benefit.  Transportation and lodging costs related to the person’s medical care can also be covered, but there are specific rules, so it is best to consult with a tax professional.  The payments must go directly to the care provider or insurance company, not to the individual receiving care, to avoid it being considered a taxable gift above the annual exclusion amount. 

Consider the following example:  

Waylon and his neighbor Tom are lifelong friends.  Tom is at Waylon’s house for dinner when he begins to have extreme stomach pain and nausea.  Waylon calls 911 and an ambulance takes Tom to the hospital.  Once at the hospital, Tom is rushed into surgery to have his appendix removed.  A few weeks later, Tom receives a bill from the hospital for $25,000.  Waylon knows Tom has been down on his luck financially and he does not want Tom stressed about the cost of the life-saving surgery.  Waylon pays the full $25,000 directly to the hospital for Tom’s surgery.  Additionally, Waylon gifted Tom $10,000 to help cover his lost wages while he recovered.  By using a combination of the medical expense exemption and the annual gift exclusion, Waylon was able to help out Tom with $35,000 without having to pay gift taxes or adversely affecting the lifetime gift exemption.

Estate Planning Implications

Farmers who may wish to transfer wealth to others during their life should keep in mind the annual gift exclusion and the education and medical payment exclusion.  These strategies allow money or other assets to be transferred without negative gift or estate tax implications.  Using these exclusions can help farmers plan their estates by passing on assets, supporting education, and managing healthcare expenses with fewer tax issues. 

A Comparison of Business Entities Available to Ohio Farmers

By: Robert Moore, Barry Ward, OSU Extension

Ohio farmers have many choices when selecting a business entity for their farming operations. Choosing the right entity is important, as it can impact issues such as how the business functions, ownership rights, personal liability, and taxation. What should a farmer consider when deciding which type of entity to use for a business? We provide an overview of business entities used for farm operations in this bulletin, compare ten important factors to consider when making the entity selection decision, and highlight the advantages of using a formal business entity. A Business Entity Comparison Chart at the end of the publication summarizes entity characteristics. As with all legal issues, consultation with an attorney is critical to making a successful decision.

Types of business entities

Sole Proprietorship. A Sole Proprietorship is a business owned by a single person who is referred to as the “sole proprietor.” The sole proprietor and the business are one and the same—there is no separate legal business entity. The sole proprietor owns all business assets, is responsible for all liabilities, and reports income as individual income.

Partnership. A partnership exists when two or more individuals or “partners” jointly own and conduct a business for profit. A “General Partnership” consists of partners who each have management authority and personal liability for the partnership and who report income from the partnership as individual income. A different type of partnership, the “Limited Partnership,” allows investors to enter a partnership as “limited partners” without involving them in management and exposing them to personal liability for the partnership.

Click here to read more.

 

Characteristics of Beginning Farmers in Ohio and Potential Impact of the Ohio Beginning Farmer Tax Credit Program

By: PhD students Xiaoyi Fang and Zhining Sun and Professor Ani Katchova, Farm Income Enhancement Chair, in the Department of Agricultural, Environmental, and Development Economics (AEDE), and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

Click here to access the PDF version of this article that includes figures

 

Highlights

  • Ohio’s new and beginning farmers are individuals who intend to enter the farming industry or have less than ten years of experience as a farm owner/operator in Ohio.
  • Ohio’s new and beginning farmers compared to established farmers, tend to be younger, operate smaller farms, and less likely to state farming as their primary occupation.
  • The Ohio Beginning Farmer Tax Credit Program supports new and beginning farmers by providing income tax credits to: 1) beginning farmers who attend a financial management program, and 2) landowners that sell or rent farmland to beginning farmers.

Continue reading Characteristics of Beginning Farmers in Ohio and Potential Impact of the Ohio Beginning Farmer Tax Credit Program →

Federal Legislation Introduced to Address Farm Estate Taxes

Source: Robert Moore

On July 26, 2023, Representatives Jimmy Panetta of California and Mike Kelly of Pennsylvania introduced legislation related to farm estate taxes.  The proposed bill seeks to increase the limit on the deduction that can be taken by farmers under Section 2032A of the Internal Revenue Code (IRC).  The 2032A provision in the IRC allows farmers to value their land at agricultural value, rather than fair market value.  However, the current law limits the deduction to $1.16 million.  This relatively small deduction can limit the usefulness of 2032A for some farm estates.

Consider the following example:

Farmer’s estate includes 500 acres with a fair market value of $5,000,000.  The agricultural value, allowed by 2032A, is $4,500/acre or $2,250,000.  The difference between the fair market value and the agricultural value is $2,725,000.  So, by using 2032A valuation, the land value can be reduced by $2,725,000.  However, 2032A limits the deduction to $1,160,000.  Therefore, Farmer’s estate can actually use less than ½ the reduction in land value.

The newly introduced legislation would increase the 2032A deduction limit to the federal estate tax exemption, currently $12,900,000.  Applying the proposed legislation to the above scenario, Farmer’s estate would be able to deduct the entire $2,725,000.

The farm value of farmland is determined by a formula included in the IRC.  The value is the net cash rent of comparable land less real estate taxes divided by the Farm Credit System Bank interest rate, which is 4.57% for a 2022 Ohio estate.  Let’s assume the fair market cash rent for a farm is $220/acre less $50/acre for taxes.  Dividing by the interest rate, we get a value of $3,720/acre.  The 2032A rate (farm value) is usually 1/3 to ½ of the fair market value. Continue reading Federal Legislation Introduced to Address Farm Estate Taxes →

Not All Trusts Protect Assets

By: Robert Moore

How Do Retirees Define A 'Comfortable Retirement' And Should That Matter To You?

A common misperception is that all trusts protect assets from creditors, lawsuits, and nursing homes.  While some trusts do protect assets, many trusts do not.  In fact, most trusts are not designed to protect assets but instead to only transfer assets at death.  Knowing the difference between the different types of trusts is important to ensure that your trust meets your expectations for asset protection.

There are generally two different types of trusts – revocable and irrevocable.  A revocable trust is the typical estate planning trust most people use.  Because the revocable trust can be changed and assets transferred into and out of the trust, it provides no asset protection.  Essentially, if the owner/grantor can access the assets of the trust, then so can creditors.  If you can make changes to your trust and transfer assets in and out of the trust, you probably have a revocable trust.

An irrevocable trust can protect assets.  The concept of an irrevocable trust is to establish a trust that cannot be changed (with a few exceptions), transfer assets to the trust and then relinquish the right to withdraw the assets back out of the trust.  Additionally, someone else serves as the trustee to manage the trust assets.  Since the original owner of the assets no longer has access, control, or ownership of the assets, then creditors cannot access them.

It is important to keep in mind the five-year lookback rule for Medicaid.  This rule causes ineligibility for Medicaid for gifts that were made within five years of Medicaid application.  Due to this rule, establishing an irrevocable trust to protect assets from nursing home costs must be done well before the assets become at risk.

While an irrevocable trust is useful to protect assets, the irrevocable nature of the trust is a significant negative feature.  Once the irrevocable trust is established and the assets transferred, it cannot usually be undone.  Even if circumstances or goals change over time, the irrevocable trust stays in place and the assets stay in the trust.  A revocable trust, on the other hand, is flexible and can be changed as circumstances and goals change.

Sometimes a trust will include “revocable” or “irrevocable” in its name, making it obvious the type of trust.  However, many trusts do not indicate in the name if it is revocable or irrevocable.  In that case, the trust document must be reviewed to determine the type of trust.  Typically, within the first few paragraphs of the trust document, the trust will be clearly identified as either revocable or irrevocable.

Some estate plans include both a revocable and irrevocable trust.  Assets to be protected are transferred to an irrevocable trust and assets the owner wishes to retain control over are transferred to a revocable trust.  Having two trusts increase the costs of both setup and administration but it is an option for many people.

Anyone with a trust should verify the type of trust they have.  It is common that someone believes their assets are protected by their trust only to find out too late that they actually have a revocable trust and their assets are subject to nursing home costs.  A revocable trust can be converted to an irrevocable trust at any time prior to death.  If there is any doubt as the type of trust, review the trust with your attorney to be sure it meets your estate planning and asset protection goals.