If you're a family farm owner in a part of the country where real estate values have recently skyrocketed, you may not feel rich, especially if you're still getting up before the sun each day to tend your crops or livestock. However, after your death, you'll be treated like a multi-millionaire -- with the federal government assessing a tax rate of up to 40 percent of your farm and land's total value in excess of $5.43 million. This could require your heirs to be forced to liquidate a portion of the land that has remained in your family for generations, simply to pay the taxes owed to the government. What can you do to help shelter your farm from taxation even during a time when real estate costs continue to rise? Read on to learn more about farm and ranch estate planning for the family farm owner.

When will estate taxes be assessed on your farm?

The vast majority of estates in the U.S. fall well below the estate tax threshold -- the total value of houses, cars, bank and investment accounts, and other personal assets probated will be well below $5.43 million (or almost $11 million for a couple). After the estate is probated and the executor's costs and fees are paid, the assets will flow to those designated to inherit them without ever being taxed.  

However, if the total value of your farmland and other probated assets is in excess of this amount, you'll be assessed a tax of 40 percent on the amount exceeding the estate tax threshold. For example, if your total estate is assessed at $10 million and you are single, you'll pay approximately $1.82 million in taxes. This could require the liquidation of around 20 percent of your farmland by your surviving family members.

How can you keep your estate non-taxable?

There are a few ways to structure your estate that can allow you to avoid or minimize estate taxation.

The first is to place your farm into an irrevocable trust that will allow it to be distributed to your heirs upon your death. Because the farm ceases to become "your" asset as soon as it is placed into the trust, it won't be taxed as an asset upon your death, nor will it be required to be disbursed through the probate process.

If you and your family are close-knit, you may also opt to go ahead and vest ownership of the farm into your heirs by transferring the deed into their names as joint owners. They can later decide to remain joint owners or to parcel out the farm into individual portions. After transferring ownership, you'll still be able to reserve a life estate for yourself that will allow you to remain on the farm (without paying rent) for the rest of your life. 

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