Estate Tax Relief for Family Farms?

The Family Farm Preservation Act, signed by Gov. Martin O’Malley and taking effect July 1, 2012, aims to protect the future of family farms in Maryland by substantially reducing death taxes on many smaller operations.  The effect of this Act is to provide some level of estate tax relief to Maryland farmers, although the relief does come with one significant hitch. The main thrust of the Act is to exclude from a decedent’s Maryland taxable estate up to $5 million of “Qualified Agricultural Property” passing to a “Qualified Recipient.”

Qualified Agricultural Property is defined as real or personal property used primarily for farming purposes, and the term “farming purposes” has the meaning stated in Section 2032A of the Internal Revenue Code. A Qualified Recipient is an individual who enters into an agreement to use the Qualified Agricultural Property for farming purposes after the decedent’s death. Essentially, if the decedent’s primary asset is a farm valued at less than $5 million, the farm will pass free of both federal and Maryland estate tax under current laws.

However, it appears that the agreement that the Qualified Recipient must enter into must provide that the Qualified Agricultural Property be used for farming purposes for ten years following the decedent’s death. If not, the Maryland estate tax avoided by virtue of the Act will be recaptured when the Property ceases to be used for farming purposes.

For family farm owners, careful analysis of this new Act should be undertaken both in the planning phase and in the post-mortem phase. The benefits of avoiding Maryland estate tax should be balanced against the family’s wishes to continue farming. Further, the Comptroller has been directed under the Act to implement regulations, so the forthcoming regulations may provide additional requirements to observe.