The General Assembly of Maryland enacted a new law, which went in effect on July 1, 2012, entitled the “Family Farm Preservation Act of 2012”. This law provides estate tax relief to Maryland farm owners. In Maryland an estate tax is applied upon the death of a person whose estate exceeds $1,000,000 if the estate passes to someone other than the surviving spouse, or is put into a trust for the benefit of the surviving spouse. Under the new law, the first $5,000,000 of interest in farm property is exempt from the estate tax and the value of farm property in excess of $5,000,000.00 is subject to a 5% tax rather then a 16% tax.
For example, John passed away in Maryland and he had an estate of $4,000,000.00 which included a farm worth $2,000,000 which he left to his daughter. Under prior law the first $1,000,000 is exempt from Maryland estate taxes, and the remaining $3,000,000 is subject to an estate tax of 16%. This means his estate would pay $480,000 in estate taxes to the State of Maryland.
Under the new law, the first $1,000,000 of the estate is exempt from estate taxes and the second $1,000,000 is subject to a 16% estate tax. The value of the farm is exempt from estate taxes. This results in an estate tax of $160,000 rather than $480,000. You can see this provides significant estate tax relief to farm owners.
As with most tax provisions, there are some requirements that must be met in order to get the tax reduction. First, the property must be used for “Farming Purposes” such as raising livestock, harvesting crops, storing crops, and raising trees. You can find the complete definition of Farming purposes in Section 2032A(E)(5) of the Internal Revenue Code.
The property must be “Qualified Agricultural Property” which means real property, the land, or personal property (tools, tractors, removable storage bins) used primarily for Farming Purposes.
The person receiving the farm must be a “Qualified Recipient” which means the recipient of the farm must enter into an agreement to use the farm property for farming purposes. The property must be used for farming purposes for 10 years following the death of the owner of the farm. If the property is not used for farming purposes for 10 years then the initial tax rate of 16% applies.
If you are a farm owner and want more information regarding the new law and how it will affect your family, scheduling an appointment with an estate planning attorney is advisable.
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