Farms represent more than land and equipment. They hold generations of hard work, family history, and the foundation of American agriculture. But when a farm owner passes away, heirs can face staggering tax bills that force difficult decisions. Many families end up selling portions of the farm, taking on debt, or breaking up operations that stayed intact for decades.
Family farms make up 95% of all operations in the United States. Federal estate tax hits estates valued above $13.99 million for individuals in 2025, or $27.98 million for married couples. The tax rate is 40% on amounts exceeding the exemption. That math can destroy a family farm overnight. Many heirs discover they owe hundreds of thousands of dollars within nine months of a parent's death. Without cash reserves, the only option is to sell land.
The Basics of Farm Inheritance Taxes
The federal estate tax hits estates valued above $13.99 million per person in 2025, or $27.98 million for married couples. Everything exceeding the exemption gets taxed at 40%. The estate includes all property owned at the time of death, including land, buildings, equipment, livestock, grain inventory, bank accounts, and retirement funds. When prime farmland sells for $10,000 to $20,000 per acre, a mid-size operation can easily exceed these limits. Good news arrived in July 2025. The One Big Beautiful Bill Act permanently increased the exemption to $15 million per person, effective January 1, 2026, with annual inflation adjustments to take effect thereafter. Married couples get $30 million. This gives farm families more breathing room, but estates above these amounts still face the 40% tax rate.
Beyond federal estate taxes, farm families face two other tax types during succession. Gift taxes apply when you transfer property during your lifetime above the annual exclusion of $19,000 per person in 2025. Exceed that amount and you start eating into your lifetime exemption. Some states also impose their own inheritance or estate taxes separate from federal rules, with rates and exemptions varying widely.
Strategies to Minimize Inheritance Tax on Farms
Strategy
Potential Savings
Biggest Catch
Special Use Valuation
Up to $1.39M reduction
10-year farming requirement
Annual Gifting
$19K per person yearly
Lose step-up in basis
Conservation Easement
40% exclusion, $500K cap
Permanent development restriction
Estate Tax Deferral
Spread payments over 14 years
Need 35% farm assets in the estate
Life Insurance
Tax-free death benefit
Premium costs during life
Annual Gifting Gets Assets Out of Your Estate
The IRS lets you gift $19,000 per person per year in 2025 without counting against your lifetime exemption. Married couples can move $38,000 to each child annually. Run that for 20 years and you transfer $760,000 to one kid without touching your estate exemption. The gifts need to be complete transfers. You cannot gift land but keep farming it without paying rent.
Section 2032A Slashes Land Values
Farmland valued at $15,000 per acre for development might only be worth $8,000 per acre for farming. Section 2032A lets estates use the agricultural value instead of market value, capped at a $1.39 million reduction. Your heirs must keep farming the land for 10 years or the IRS claws the tax savings back.
Basic requirements:
Farm assets make up at least 50% of your total estate
Real estate accounts for at least 25% of estate value
You or family members farmed the land for 5 of the last 8 years
Property passes to qualifying family members who continue farming
Conservation Easements Lower Property Values
Put a conservation easement on your land, and you permanently restrict future development. This tanks the property value for tax purposes. The IRS lets heirs exclude up to 40% of the easement value from estate taxes, maxing out at $500,000. A $2 million easement value reduction saves $800,000 in estate taxes. The easement stays with the land forever, even if it sells.
Life Insurance Provides Tax-Free Liquidity
Life insurance death benefits pass to heirs tax-free and provide immediate cash to pay estate taxes without selling land. An irrevocable life insurance trust keeps the policy proceeds outside your taxable estate. The heirs get cash within weeks instead of waiting months to liquidate farm assets. This works best when purchased years before death, while premiums stay reasonable.
Family Limited Partnerships Move Ownership Gradually
Set up an FLP and transfer the farm into it. You keep the general partnership interest and control everything. Gift limited partnership shares to your kids over time. Those limited shares get valued at 25% to 35% discounts because they lack control and cannot be easily sold. You move more wealth using less of your lifetime exemption.
Trusts Remove Assets from Your Taxable Estate
Irrevocable trusts take assets out of your estate completely. You lose control but the property passes according to trust terms without estate tax. Generation-skipping trusts bypass your kids entirely and go straight to grandkids, avoiding estate tax at the middle generation. Grantor Retained Annuity Trusts let you transfer appreciating assets while keeping income for a set period. These work best for families with estates well above exemption amounts.
Section 6166 Buys Time to Pay
Qualified farm estates can defer estate tax payments for up to 14 years under Section 6166. Farm assets must represent at least 35% of the total estate. You pay interest-only for five years, then principal and interest for nine more years. Interest rates stay low. This keeps heirs from having to dump land at auction to raise cash in nine months.
Buy-Sell Agreements Lock in Values
These contracts establish how farm ownership transfers if a partner dies or wants out. The agreement sets the purchase price ahead of time, which can establish the estate tax value. This prevents fights between farming and non-farming heirs about buyouts. The agreement needs funding through life insurance or installment payments to work properly.
How These Strategies Play Out
A grain operation in Illinois worth $18 million passes to three kids in 2025. No planning means a $1.6 million federal tax bill. The parents use special use valuation for a $1.39 million reduction. They gifted $500,000 in land over 15 years. Add the marital exemption and spousal portability, and the estate pays zero federal tax.
A ranch in Nebraska faces a 13% state inheritance tax for the son taking over. The parents donated a conservation easement on 500 acres, dropping land value by 30%. The estate value falls below the state taxable threshold. The family avoids over $200,000 in Nebraska inheritance tax.
An Iowa family plans 10 years out. They form an LLC holding the farmland and gift 5% of the LLC shares annually to their daughter. Lack of control discounts means each 5% gift only counts as 3.25% against their exemption. After 10 years, they transferred 50% ownership while only using 32.5% of their gift exemption.
Mistakes That Cost Farm Families
Waiting Until It Is Too Late
These strategies take years to work. Starting planning at age 75 or after a health scare leaves almost no options. Begin 10 to 20 years before you plan to retire.
Gifting Too Much Land During Life
Property inherited at death gets a step-up in basis to current market value. Capital gains disappear. Gift land during life and your kids inherit your original low basis. They might pay more in capital gains tax than you saved in estate tax. This trade-off requires professional analysis.
Using Your Cousin to Value the Farm
The IRS disputes farm valuations constantly. Hire a qualified rural appraiser who knows comparable sales and can defend the numbers. Family members guessing at land values brings IRS audits and penalties.
No Cash to Pay the Tax Bill
Estate taxes come due in nine months. Farms do not produce that kind of cash quickly. Without life insurance, savings, or access to Section 6166 deferral, families sell land. That defeats the whole point of keeping the farm together.
Keeping Succession Plans Secret
Kids who find out their inheritance plans at the funeral lawyer meeting fight each other in court. Some want to farm. Others want cash. Parents who never discuss plans leave messes that burn through estate value in legal fees and destroy family relationships.
How High Point Land Company Helps Farm Families
High Point Land Company works with families who own farmland in the Midwest on succession planning and keeping operations intact across generations. Our team has seen what works and what creates expensive problems down the road.
Professional land appraisals that meet IRS requirements and hold up under scrutiny.
Farm management services keep land productive during ownership transitions.
Coordination with estate attorneys and CPAs on transfers, LLCs, and tax planning.
Marketing farms for sale when partial sales become necessary.
Live auctions, sealed bids, and traditional listings are customized to each property.
Action Steps to Take Right Now
Pull out your will and trust documents. If they have not been reviewed in five years, schedule a meeting with an estate attorney who handles agricultural property. List every farm asset, including land, equipment, grain inventory, livestock, and any mineral rights. Get current land values from a qualified appraiser, not a guess from the coffee shop.
Calculate your total estate value and compare it to the exemption thresholds. With exemptions rising to $15 million per person in 2026, many farms will fall below the taxable threshold. But land values keep climbing, and what looks safe today might not be in 10 or 20 years. The strategies outlined here take time to implement, so starting early gives you maximum flexibility.
Schedule a family meeting and talk openly about who wants to farm and who wants out. Each person knowing where they stand prevents fights later. Look at the strategies outlined here and decide which combinations fit your situation. Contact High Point Land Company for professional appraisals, farm management help, or guidance on selling the land options that preserve wealth while meeting liquidity needs.
References
IRS - Estate Tax
USDA Economic Research Service - Federal Estate Taxes
One Big Beautiful Bill Act Estate Tax Updates (2025)
USDA NASS - Family Farm Statistics
Section 2032A Special Use Valuation (Moss Adams)
