Finding liquidity for estate taxes: Protecting your family farm and business before the 2025 ‘sunset’

Farmers, ranchers and even family business owners face a particular dilemma when it comes to estate planning. Their wealth is typically tied up in land, equipment, buildings and business infrastructure — assets that cannot be easily converted to cash. This creates what estate planners call the “illiquidity problem.”

When estate taxes become due nine months after death, these families often lack sufficient liquid assets to pay the tax bill. Without proper planning, this can force distressed sales of land or business assets, potentially dismantling operations that took generations to build. The problem is compounded by the fact that rushed sales rarely bring fair market value, meaning more assets must be sold to cover the same tax liability.

As estate planning attorney Polly J. Dobbs, writing for the Land Conservation Assistance Network, puts it: “Most farmers are land rich and cash poor with little to no estate planning in place. This situation is a ticking time bomb that will explode into a financial disaster when the farm owner dies.”

Farming families and business owners facing potential estate tax burdens have several strategic options to address liquidity concerns without sacrificing their operations. The tax code recognizes the unique challenges faced by agricultural enterprises and offers specific provisions to help preserve these important legacies.

The tax code includes several provisions specifically designed to help farm families and business owners manage estate tax burdens. Special Use Valuation (Section 2032A) represents a significant opportunity for agricultural operations. This provision allows farm or ranch land to be valued based on its agricultural use rather than its fair market value, which might be substantially higher due to development potential. For 2025, this can reduce the value of qualified farmland by up to $1.42 million for estate tax purposes. To qualify, the farm must remain in agricultural use for 10 years after the owner's death, and family members must continue to participate in farm operations.

Estate Tax Deferral (Section 6166) provides another valuable option when a closely held business, including a farm or ranch, exceeds 35% of the adjusted gross estate. This provision allows estate taxes to be paid over 14 years — a four-year deferral followed by 10 years of payments. Only the portion of estate tax attributable to the business interest qualifies. This extended payment schedule can provide crucial breathing room for farm and ranch families to generate income from operations rather than selling assets to pay taxes.

Life insurance represents one of the most effective tools for providing estate tax liquidity, especially for land-rich, cash-poor families. When properly structured, life insurance offers immediate cash exactly when needed, creating liquidity precisely at the time estate taxes become due.

For farm families, an irrevocable life insurance trust (ILIT) can be particularly valuable. The trust owns a life insurance policy on the farm owner's life, with proceeds available to pay estate taxes when needed. Since the policy is owned by the trust rather than the individual, the death benefit remains outside the taxable estate, effectively creating tax-free dollars to satisfy estate tax obligations.

This strategy works especially well for families where some children work the farm while others have pursued different careers. The life insurance proceeds can provide cash for non-farming heirs while allowing the farming heirs to keep the agricultural operation intact. This approach helps balance the competing interests of treating all children fairly while preserving the operational integrity of the farm business.

One of the most popular strategies before the 2025 sunset is to utilize the current high exemption through strategic gifting, particularly for agricultural operations and family businesses. For farm families, this might involve gifting portions of the operation to the next generation during your lifetime. These gifts can include land parcels, equipment, livestock or ownership interests in the farm business entity. By making these gifts now, you can lock in existing higher exemption amounts and remove future appreciation from your taxable estate.

Many farm families use entity structures like family limited partnerships or LLCs to facilitate these transfers. These entities can provide the older generation with continued income and management control while transferring ownership interests to the next generation at potentially discounted values for gift tax purposes. This approach allows for a gradual transition of the operation while maximizing tax benefits and maintaining operational continuity.

When other options aren't sufficient, borrowing can provide necessary liquidity while preserving valuable farm or ranch assets. Graegin loans, named after a landmark tax court case, represent a specialized borrowing strategy that allows an estate to deduct the entire interest amount upfront as an administration expense, potentially reducing the overall estate tax burden. For farm families facing significant estate taxes, this can be a valuable tool to preserve the agricultural operation while managing tax liabilities.

Intra-family loans offer another borrowing option, where funds come from another family-owned entity to pay estate taxes. These arrangements can offer more flexible terms than commercial financing, keeping financial arrangements within the family and potentially providing more favorable terms than commercial loans. This approach can be particularly useful when some family members have liquid assets that can be loaned to the estate to preserve farm operations.

The estate tax exemption sunset creates both challenges and opportunities for land-rich, cash-poor families. By understanding your options for estate tax liquidity and implementing appropriate strategies now, you can help protect your financial legacy and ensure a smooth transition of assets to your heirs without forced liquidations or unnecessary tax burdens. For farm and ranch families, the stakes are particularly high. Your land represents not just financial value but also a way of life and a connection to previous generations. Thoughtful planning that addresses both tax efficiency and family dynamics can help preserve this legacy for generations to come.