Most farm families want to pass their land down to the next generation without losing acres to taxes. The good news is that very few farms actually pay federal inheritance taxes. In 2022, only 87 farm estates across the entire United States had to pay these taxes. That represents just 0.3% of all farm estates.
The news gets even better for 2026 and beyond. The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently increased the federal estate tax exemption to $15 million per person and $30 million for married couples starting January 1, 2026. This means even fewer farm families will face federal estate taxes going forward.
How Farmers’ Inheritance Tax Actually Works
Two main types of taxes can affect farm families when property changes hands. The federal estate tax gets paid by the estate before anything goes to heirs. State inheritance taxes get paid by the people who receive the property, and rates depend on how closely related they are to the person who died.
Farmers’ inheritance tax specifically refers to taxes owed when agricultural property transfers from one generation to the next. The farmland inheritance tax part deals with how the government values your land and what rate applies to that value.
The federal estate tax uses a 40% rate, but only on amounts above the exemption. For 2025, the exemption is $13.99 million per person or $27.98 million for couples. Starting in 2026, this increases to $15 million per person or $30 million for couples. So if a farm worth $20 million passes to heirs in 2026, the taxable amount would be $5 million ($20M minus $15M exemption). The estate tax owed would be $2 million (40% of $5 million).
State Taxes That Hit Farmers
While most states do not impose inheritance or estate taxes, several states still do, and farmers in these states face additional tax burdens.
| State | Tax Type | Key Details (2025) |
| Connecticut | Estate Tax | Exemption: $13.99 million. The tax is 12% on the portion over the exemption. |
| Illinois | Estate Tax | Exemption: $4 million. Tax rates go up to 16%. |
| Kentucky | Inheritance Tax | Taxed Heirs: Nephews, nieces, and other non-direct family members. Direct descendants are exempt. |
| Maryland | Estate & Inheritance Tax | Estate Exemption: $5 million. Inheritance Tax: 10% on property inherited by non-lineal heirs. |
| Massachusetts | Estate Tax | Exemption: $2 million. Tax rates go up to 16%. |
| Minnesota | Estate Tax | Exemption: $3 million. Tax rates go up to 16%. |
| Nebraska | Inheritance Tax | Taxed Heirs: All except a spouse. The tax rate and exemption amount vary by the heir’s relationship. |
| New Jersey | Inheritance Tax | Taxed Heirs: All except a spouse, parents, children, and stepchildren. Rates go up to 16%. |
| New York | Estate Tax | Exemption: $7.16 million. Rates go up to 16%. |
| Oregon | Estate Tax | Exemption: $1 million. Rates range from 10% to 16%. |
| Pennsylvania | Inheritance Tax | Taxed Heirs: All except a spouse. A tax rate of 4.5% applies to lineal heirs (children, grandchildren, etc.). |
| Rhode Island | Estate Tax | Exemption: $1.8 million. Tax rates go up to 16%. |
| Vermont | Estate Tax | Exemption: $5 million. The tax is 16% on the portion over the exemption. |
| Washington | Estate Tax | Exemption: $3 million. Rates range from 10% to 35%. |
Strategies to Reduce Farmland Inheritance Tax
Smart planning can dramatically reduce the tax burden on farm families. Here are five proven strategies that work for agricultural operations:
Annual Gifting Programs
Annual Gifting Programs allow you to give away $19,000 per person per year without using your lifetime exemption. A married couple can give $38,000 annually to each child and grandchild. Over 20 years, a couple with three children could gift away a significant amount of farm assets without paying any gift taxes.
Family Limited Partnerships (FLPs)
Family Limited Partnerships (FLPs) let you transfer farm ownership while maintaining control during your lifetime. You put the farm into a partnership, then gradually gift partnership interests to your children over time. These partnerships often allow for valuation discounts of 20-40%, multiplying the effect of your annual gifts.
Conservation Easements
Conservation Easements reduce your farm’s taxable value by restricting future development. These easements can reduce land values by 30-60% for tax purposes. A farm worth $3 million might only be valued at $2 million for estate tax purposes after a conservation easement.
Stepped-Up Basis Benefits
Stepped-Up Basis Benefits happen automatically when someone inherits property. Your tax basis becomes the fair market value at the time of death, not what the previous owner originally paid. This eliminates capital gains taxes on all the appreciation that occurred before inheritance.
Special Use Valuation (Section 2032A)
Special Use Valuation (Section 2032A) allows qualifying farm estates to value agricultural land based on its farming income rather than its development potential. For 2025, this can reduce the value of farmland by up to $1.42 million. The trade-off is that heirs must continue farming the land for at least 10 years.
Keeping the Farm in the Family
Succession planning goes beyond just tax strategies. The emotional and practical aspects of transferring a farm operation require careful attention to family dynamics and business continuity.
Family meetings should start years before any transfer takes place. These conversations help identify which children want to stay involved in farming, how to fairly compensate those who choose different careers, and how to maintain family relationships during the transition. Many farm families struggle because they assume everyone understands the plan without ever discussing it openly.
Legal documents like wills, trusts, and buy-sell agreements provide the framework for succession, but they work best when they reflect decisions the family has already made together. Trusts can provide tax benefits while making sure the farm stays intact. Buy-sell agreements help prevent situations where one heir wants to sell their share to outsiders, which could force the remaining family members to buy them out or face losing control of the operation.
Role of Land Value in Taxes
Property appraisals determine how much tax your estate will owe, making accurate valuation critical for tax planning. Professional appraisers consider factors like soil quality, water rights, location, and highest and best use when determining fair market value.
The gap between agricultural value and development value creates both opportunities and challenges for farm families. Land that produces $300 per acre in farm income might be worth $15,000 per acre for housing development. Estate taxes are typically based on the higher development value, which can create enormous tax bills for farms near growing cities. For example, farmland appraised at $12,000 per acre might qualify for agricultural use valuation at $4,000 per acre, but if the land stops being farmed, the family typically owes back taxes plus interest.
Why Work With Experts
Farm inheritance tax planning touches federal law, state law, family dynamics, and business operations all at once. Even with higher federal exemptions protecting most farms, you still need accurate land valuations for estate planning, proper legal documents to prevent family conflicts, and strategies to minimize state taxes where they apply. Tax advisors help you navigate current rules and plan for potential future changes, while agricultural attorneys draft wills and trusts that actually work for farming operations.
High Point Land Company works with farm families to determine accurate land values and connect you with professionals who specialize in agricultural estate planning. Our expertise with farms for sale across major agricultural states like Iowa, Illinois, Nebraska, and Missouri gives us deep knowledge of farmland valuations, market trends, and the challenges farm families face during succession planning. Smart planning preserves more wealth for the next generation and prevents family disputes down the road.
Sources:
- Federal Estate Tax Exemption (2025)
- Reference: The 2025 exemption of $13.99 million, the 2026 exemption of $15 million, and the 40% tax rate.
- https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Federal Estate Tax Exemption (2026)
- Reference: The permanent increase of the federal estate tax exemption to $15 million per person ($30 million for a married couple) starting in 2026.
- https://www.goodwinlaw.com/en/insights/publications/2025/07/alerts-practices-tax-obbba-solidifies-high-estate-tax-exemptions
- Annual Gifting Programs
- Reference: The annual gift tax exclusion for 2025 of $19,000 per person.
- https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances-1
- Special Use Valuation (Section 2032A)
- Reference: The 2025 maximum reduction of $1.42 million.
- URL: https://www.law.cornell.edu/uscode/text/26/2032A
- State Taxes That Hit Farmers
- Reference: The details for each state’s estate or inheritance tax.
- URL: https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
- Farm Estate Tax Statistics
- Reference: The statistic that only 87 farm estates paid federal estate taxes in 2022.
- https://www.ers.usda.gov/data-products/charts-of-note/chart-detail?chartId=106559
