Hello again Mary,
The only reason that I suggested gifting the property to your son now was because you asked in your original question how you could get the farm out of your estate. Gifting it to your son does not really get it out of your estate for estate tax purposes, but it does give your son legal ownership to the property now which I thought was perhaps what you were wanting to do. If that is not the case, then there is no advantage to gifting him the property.
If you would decide to gift him the property, the entire gift of $1.5 million is included in your taxable estate when you pass away. But you would receive credit for the gift taxes already paid. The gift tax rate is the same as the estate tax rate, which in 2011 will be 55%.
So let's just use this as an example. If your entire estate including the farm is $6 million, if you now make a gift of the farm to your son and the farm is worth $1.5 million, you would pay gift tax on $.5 million and the tax would be $275,000. Now if something were to happen to you while the estate exclusion is set at $1 million, then your total estate would be the remaining $4.5 million you have in assets plus the $1.5 million you gifted, bringing your total estate back up to the $6 million. You would then deduct from that the $1 million exclusion, leaving you with a taxable estate of $5 million. At an estate tax rate of 55%, your total estate tax would be $2.75 million. You would take a credit against that for the $275,000 you paid as gift tax, leaving you with a balance due of $2,475,000 to cover your estate taxes.
You are correct that I had a typo in my third paragraph where I meant to say $1.5 million instead of $.5 million. I apologize for that typing error and hope I did not cause you too much confusion.
The simplest thing to do here may be just to make it a part of your will that any estate taxes which are due are to be paid using assets of the estate other than the farm. That way you will not have to worry about your son having to sell the farm in order to cover the portion of estate taxes that would be due on that part of your estate. The only other option would be simply to also leave him enough money to cover the taxes which would be due on the farm.
Thank you Mary