Selling the Family Farm to a Farmer: A New Way to Pay the Tax Over Four Years

 

Many of the families we work with have the same quiet question at the kitchen table. Mom and Dad are ready to stop farming. A neighbor or a young farmer wants the ground. But the land has been in the family for decades, and the tax on the gain from a sale looks enormous.

A new federal rule may help. The One Big Beautiful Bill Act created Internal Revenue Code § 1062. It lets a seller who sells qualifying farmland to a working farmer pay the tax on the gain over four years instead of all at once. On September 28, 2026, Treasury and the IRS issued proposed regulations explaining how it will work (IR-2026-115; REG-117095-25).

This post explains what the rule does, what it does not do, and how it fits with aging-in-place and estate planning. It also explains how to capture it if it makes sense for your family.

At a Glance

• What it is: a way to pay the federal income tax on a farmland sale over four years.
• Who can use it: sellers of land farmed for about 10 years, selling to an individual who farms.
• The catch: the gain is still taxed in the year of sale, and the seller's death makes the remaining tax due at once.
• Often the better choice for older owners: holding the land and leasing it, so the heirs receive a stepped-up basis.

What the New Rule Does

Section 1062 lets a seller elect to pay the federal income tax on the gain from a farmland sale in four equal annual installments. The first 25% is due on the original due date of the return for the year of sale, whether or not the return is extended. The other three payments are due on the same date in each of the next three years.

The rule applies to sales in tax years that begin after July 4, 2025. What counts is when the seller's tax year begins, not the date of the sale. For most people, who file on a calendar year, the 2025 tax year began January 1, so even a fall 2025 sale does not qualify; 2026 is the first year the rule applies for calendar year filers. Estates and some trusts with fiscal years should check their own dates.

Here is how the payments look if a sale adds $200,000 to a seller's federal income tax:

Payment	When it is due	Amount
First	Original April due date for the year of sale	$50,000
Second	One year later	$50,000
Third	Two years later	$50,000
Fourth	Three years later	$50,000

Without the election, all $200,000 would be due with the first return.

Three Conditions Must Be Met

The rule looks at three things: the land, the buyer, and a promise about the land's future use. All three must be in place on the day of closing. If any one is missing, the four-year option is lost, and the full tax is due with the return.  They are:

• The land must be qualified farmland. It must be U.S. real property that the seller farmed, or leased to a qualified farmer for farming, for substantially all of the 10 years before the sale. A retired owner who rents the ground to a neighboring farmer can qualify, as long as the tenant is an individual actively engaged in farming;

• The buyer must be a qualified farmer. That means an individual who is actively engaged in farming under federal farm-program rules (7 U.S.C. § 1308-1). A sale to a farming son, daughter, or neighbor who will keep farming fits the rule well; and

• The land must carry a 10-year farming covenant. The deed or a separate recorded instrument must legally prohibit any use other than farming for 10 years after the sale. Under the proposed regulations, the covenant must be recorded at closing, and a copy goes with the seller's return.

The Buyer Side Trap

The proposed regulations add a trap on the buyer's side. If, at the time of the sale, there is a plan or arrangement to pass the land to an unrelated person who is not a farmer, the sale does not qualify. An unplanned later sale does not, by itself, disqualify it, but the 10-year farming covenant still binds any new owner. Specifically, under proposed § 1.1062-1(p)(2), the buyer is not a qualified farmer if:

"pursuant to a plan or an arrangement between the seller, buyer, and a third party existing at the time of a sale or exchange … the qualified farmland property subsequently is transferred to a person who is neither" related to the buyer (under §§ 267(b) or 707(b)(1)) nor a qualified farmer.

The following explains the contours of the trap: 

• It is tested at the time of the sale. A plan or arrangement must exist at closing. A later transfer forced by circumstances nobody planned (financial trouble, foreclosure, divorce, the buyer's death) is not caught by this test.

• The later transfer must also go to the wrong person. A transfer to the buyer's family or related entities is outside the test, even if they don't farm. So is a transfer to another qualified farmer.

• The text arguably requires the seller to be involved. It speaks of an arrangement "between the seller, buyer, and a third party." Read literally, a buyer's private side deal that the seller knew nothing about may fall outside the trap. The IRS, however, may read it more broadly, and this is a good subject for a comment before the November 30 deadline.

• Timing is evidence. A resale to a developer six months after closing invites the argument that a plan existed all along. That's why buyer representations and a documented farming intent matter at closing.

• The regulations are silent on what happens afterward. They don't say whether a later transfer or a covenant breach lets the IRS revoke the seller's election. The acceleration events are all on the seller's side: missed payments, the seller's death, and, for trusts and estates, termination or selling substantially all assets. Nothing makes the buyer's later conduct accelerate the seller's tax. The real exposure is that if a disqualifying plan existed at closing, the election may fail from the start, and the full tax would have been due with the first return.

• The regulations also don't say who enforces the covenant. They require only that it be enforceable against later owners. Under state law, a covenant needs someone entitled to enforce it, such as the seller's retained land, a named holder, or an agricultural easement held by an eligible organization. Drafting that correctly is how the seller protects the covenant's validity.

Practical Protection for the Seller

Put protections in writing, give them teeth, and don't undermine them by engaging in risky or prohibited conduct.  Put the protections in writing: 

• Get the Buyer's promise: The purchase agreement should state plainly that the buyer has no plan or arrangement to pass the land to an unrelated non-farmer.

• Make the Promise Count: If it turns out to be false, the buyer pays the seller's added tax, plus any interest and penalties.

• Stay Out of Side Deals: The seller should never sign onto or help arrange any deal with a later buyer. One side agreement can sink the election.

• Make the Covenant Enforceable: Have it drafted to hold up under your state's law, and record it no later than the deed.

Making the Election

The seller makes the election on Form 1062, filed with the return for the year of sale. If that return is extended, the form can be filed by the extended due date. The first payment is still due in April. Partners and S corporation shareholders elect individually.

IRS Notice 2026-3 also lets sellers leave the deferred tax out of their estimated tax payments. That relief holds only if the election is made properly and every installment is paid on time.

What It Does Not Do

The election spreads out the payment of the tax. It does not spread out the gain. In a cash sale, the entire gain is still reported in the year of sale. For aging clients, that difference matters in four ways:

• Medicare Premiums. Medicare Part B and Part D premiums are based on income from two years earlier. A large gain can raise those premiums for a year, even though the tax is paid over four;

• Medicaid and Other Benefits. Once the sale closes, the proceeds are countable resources. Money set aside to pay later installments is still yours, and a Medicaid caseworker will count it. The election does not shelter anything;

• Lost step-up in basis. Farmland held until death generally receives a new tax basis equal to its value at death. For many families, that erases the gain entirely. A lifetime sale gives up that benefit, and no installment election brings it back;

• State tax and the 3.8% surtax. Only regular federal income tax is spread out. Ohio income tax and the 3.8% net investment income tax on the gain are due for the year of sale.

The election helps with cash flow. It does not reduce the tax.

When Death, Trusts, and Estates Change the Math

For older sellers, the most important rules are the acceleration rules. Under these rules, the remaining installments can become due all at once. That is why the election is often worth more to a healthy 68-year-old landlord than to a frail 93-year-old.

• The Seller's Death: If the seller dies, all remaining installments come due with the seller's final income tax return, on its original due date. The four-year spread ends at death. However, the proposed regulations let a personal representative still make the election for a sale completed before death, so an estate is not shut out entirely.

• Missed Payments. Missing any installment accelerates the full unpaid balance.

• Revocable Living Trusts: A revocable trust is usually a grantor trust. It is disregarded for this purpose, so the grantor makes the election as if the grantor owned the land directly. At the grantor's death, the individual acceleration rule applies.

• Estates and Irrevocable Non-grantor trusts: An estate or non-grantor trust is its own taxpayer. If it terminates, or sells substantially all of its assets, its own remaining installments accelerate. Payments can continue if an eligible transferee agrees to take them over. Beneficiaries who are taxed on part of the gain make their own separate elections.

The practical lesson is liquidity. If a seller in poor health elects the four-year plan, the family should assume the remaining tax may come due within months. Do not spend or give away the money set aside for it. Some families keep a cash reserve or life insurance for this purpose. Make sure the successor trustee and personal representative know the obligation exists.

Weighing It Against the Alternatives

The four-year election is one tool among several. For an older owner, holding the land until death is often the strongest option, because the basis step-up can eliminate the gain. Neither Ohio nor Missouri has an estate tax, and the federal exemption is $15 million per person, so most farm families owe no estate tax at all. The right choice depends on health, cash needs, family plans, and whether a farmer buyer is ready now.

Comparing Your Options for the Family Farm

Option	What it does	Best fit	Watch out for
Section 1062 election	Buyer pays at closing; seller pays the tax over four years	Seller wants a clean cash sale to a working farmer	Gain is still taxed in the year of sale; death accelerates the tax; 10-year farming covenant limits the land
Hold until death; lease in the meantime	Rent provides income; heirs receive a stepped-up basis	Older owner who does not need the sale proceeds	Not an option if the land must be sold to pay for care
Land contract (§ 453 installment sale)	Buyer pays over time; gain is taxed as payments arrive	Buyer needs seller financing	Seller carries the buyer’s credit risk; gain left in the note at death gets no step-up
Like-kind exchange (§ 1031)	Gain is deferred by buying replacement real estate	Owner who wants to stay invested in land	Strict deadlines; the owner still owns and manages real estate
Charitable remainder trust	Trust sells without immediate tax and pays the owner income	Charitably inclined owner	Irrevocable; the remainder goes to charity
Conservation easement	Sells or donates development rights; can bring a deduction	Owner who wants the land kept in farming permanently	Permanent restriction; appraisal and IRS scrutiny
Lifetime gift to family	Removes the land from the estate	Very large estates facing estate tax	Heirs take the owner’s low basis and lose the step-up

*A note on land contracts: if part of the price is paid over time, the four-year option covers only the tax on gain recognized in the year of sale. It does not automatically extend to later payments under the contract.

**The options can also be combined. For example, an owner might sell part of the land under § 1062 and keep the rest for the step-up.

The covenant has practical costs of its own. A 10-year farming-only restriction removes developers and investors from the buyer pool. Near a growing town, that can mean a lower price. The buyer's lender and title company must also accept a recorded use restriction. Before choosing, compare the tax benefit with any loss in price. When the values are large, retain a state-certified appraiser to value the land both with and without the covenant, and to walk the family through the likely outcomes, risks, and rewards of each.

How to Capture It

If the four-year election fits your plan, the work happens before, at, and after closing. Missing a step can cost the election.

• Before Signing a Purchase Agreement:

• Gather Evidence:  Obtain proof of 10 years of farming use, for example through Schedule F returns, written farm leases, and Farm Service Agency records.  Obtaining an affidavit is easy, but it might be insufficient as proof.

• Determine Buyer Eligibility: Confirm that the buyer is an individual actively engaged in farming, and ask for a written representation in the contract. If the buyer wants to take title through an LLC or corporation, get advice first. The rules define a qualified farmer as an individual.  

• Get it in Writing: Get the buyer's written promise that the buyer does not plan to transfer the land to an unrelated non-farmer.  Have the buyer also agree to reimburse you for any added tax, interest, and penalties if that promise proves false.

• Stay Out of the Next Sale: The proposed anti-abuse rule disqualifies the buyer if, at closing, the seller, the buyer, and a third party already have a plan to move the land to an unrelated non-farmer. The written promise is not enough if the seller is on the side agreement.

• Get it Early: Raise the covenant early with the buyer, the buyer's lender and the title company.

• Do the Math: Have your tax advisor estimate the tax on the gain, the cost if the installments accelerate, and the cost of the covenant. Compare the election with a land contract and with holding the land. The election spreads only the payment of the extra federal income tax. The gain is still recognized in the year of sale, so that year’s income, not the later installment checks,— is what drives Medicare IRMAA, the net-investment-income-tax base, and how much of Social Security is taxable. Spreading the payments does not spread those hits.

• Update the Estate Plan of the Person Who Will Owe the Tax: A will, trust, and power of attorney should authorize the fiduciary to complete the election, file Form 1062, and pay any accelerated balance, including the balance that can come due at death. If a partnership or S corporation sells the land, the entity does not elect. Each partner or shareholder elects on that person’s share of the gain, and the entity only files Schedule A (Form 1062) and passes along the covenant. In that case, update the partner’s or shareholder’s documents, not just the entity’s.

• Before Closing: 

• Prove the buyer qualifies: Don't rely on the buyer's word. Ask for documents showing they are actively engaged in farming, such as FSA records, a recent Schedule F, or current farm leases. Put a copy in the closing file.

• Back the indemnity with something real:  A promise from a buyer who has no money left is worth little. On a large sale, consider holding back part of the price in escrow or asking for a personal guaranty.

• Make the Buyer's Qualification a Condition of Closing:  Closing should be conditioned on the buyer documenting qualified-farmer status and signing a recordable farming covenant. If either fails, the seller can walk away or renegotiate the price. 

• At closing:

• Recording: Record the 10-year farming covenant, either in the deed or as a separate instrument recorded no later than the deed.

• Recordkeeping: Keep a recorded copy for your tax return.

• After closing

• Tax Filing:  File Form 1062, its Schedule A, and a copy of the covenant with your return for the year of sale. If you extend the return, file the form by the extended due date.

• Payment: Pay the first 25% of the tax due by the return's original April due date (for calendar year filers). For others, the tax is due on the the original due date of the return for the year of sale, without extensions. A filing extension does not extend this payment.

• Management and Administration: Calendar the remaining three installments, and keep the funds for them separate and untouched.

• Plan for Death:  Death accelerates the bill. If an individual seller dies, the unpaid installments are due on the original due date of the final return, without extensions, not on the original four-year schedule and not on the date of death. For a C corporation, trust, or estate, a liquidation or a sale of substantially all assets can make the balance due on the date of that event. The will, trust, and power of attorney should authorize the fiduciary to finish the election and to pay that accelerated balance, and the liquidity plan should assume the rest of the tax can come due with the final return.

These rules are proposed, not final. Until final rules issue, follow the statute and the current Form 1062 instructions, and ask your advisors how the final version may differ.

The Bottom Line

Section 1062 is good news for farm families who want to sell to the next generation of farmers. It keeps land in agriculture and eases the cash strain of a large tax bill. It is not a tax cut, and it is not always the best choice for an older owner. Holding the land for the step-up, leasing it to a farmer, or combining strategies may serve the family better.

The decision touches taxes, Medicare, long-term-care planning, and the estate plan all at once. Talk with your attorney and tax advisor before you sign a purchase agreement, not after.

For advisors: comments on the proposed regulations are due November 30, 2026.

This article is general information, not legal or tax advice. The rules discussed are proposed and may change. Consult your own advisors about your situation.

When Courts Look Beyond the Paper: Lessons for MAPTs, Irrevocable Trusts, and Late-in-Life Planning

• At a glance

  • Five weeks before Anne Fields died of Alzheimer’s disease, her agent moved about $17 million of her assets into a family limited partnership.
  • The estate reported her partnership interest at $10.9 million, a discount of roughly $6 million.
  • The Tax Court and the Fifth Circuit pulled the full $17 million back into her estate under IRC § 2036(a). The result was a $1.8 million tax deficiency, a $270,000 penalty, interest, and years of litigation.
  • The estate’s nontax reasons failed because the facts didn’t support them. Hiring professionals did not avoid the penalty.
  • The lesson reaches beyond partnerships: planning done in the shadow of death or long-term care gets the hardest look, including Medicaid asset protection trusts.

  Five Weeks

On May 20, 2016, Anne Fields was in the end stage of Alzheimer's disease. She had fallen repeatedly, broken her hip twice, and been in and out of the hospital. That day her great-nephew, acting under a power of attorney she had signed six years earlier, formed a limited partnership. Over the next three weeks he moved about $17 million of her assets into it. She went into hospice on June 15 and died on June 23.

On paper, she now owned a 99.9941% limited partnership interest instead of the assets themselves. Because a limited partner can't control the partnership or easily sell the interest, the estate valued her interest at $10,877,000. The paperwork had made roughly $6 million of value disappear for estate tax purposes.

The IRS disagreed. So did the Tax Court (T.C. Memo. 2024-90), and on June 8, 2026, so did the Fifth Circuit in Estate of Anne Milner Fields v. Commissioner. The full $17 million went back into her estate. The estate owed an additional $1,828,594 in tax, plus a 20% accuracy-related penalty of $270,417, plus interest, plus the cost of years of litigation. The strategy meant to save tax cost the beneficiaries far more than it could ever have saved.

The Timeline

When	What happened
2010	Fields signs a will and a power of attorney naming her great-nephew, Bryan Milner, as executor and agent
2011	She is diagnosed with Alzheimer’s disease
2011 and 2013	Two incidents of financial elder abuse occur
May 20, 2016	Milner forms AM Fields, LP; his own LLC is the general partner, with a $1,000 contribution
May 25 – June 13, 2016	About $17 million of her assets move into the partnership
June 15, 2016	She enters hospice
June 23, 2016	She dies
Estate tax return	Her partnership interest is reported at $10,877,000
2024	The Tax Court includes the full $17 million; deficiency of $1,828,594 and penalty of $270,417
June 8, 2026	The Fifth Circuit affirms

Why the Partnership Didn't Work

Section 2036(a)(1) pulls property back into a decedent's estate if she transferred it during life but kept the use or income from it until death. Fields kept exactly that. The partnership held her money, and her money paid for her life.

There is one exception: a "bona fide sale for an adequate and full consideration." For a family partnership, courts generally require a legitimate and significant nontax reason for forming it. As the Fifth Circuit put it, "A significant purpose must be an actual motivation, not a theoretical justification."

The estate offered several reasons. The courts tested each one against the facts.

The Estate’s Reasons, and What the Courts Found  The estate’s reason What the courts found The power of attorney had limits, and the successor agents were a concern No contemporaneous evidence that anyone was concerned. Fields was of sound mind when she chose the successors. The partnership made succession harder, because it required unanimous consent. Financial institutions wouldn’t honor the power of attorney The agent moved $17 million in about three weeks using that same power of attorney. The assets needed to be consolidated and streamlined The assets were a professionally managed brokerage account, bank stock, and a tree farm run by an outside company for decades. There was nothing to consolidate. The partnership would protect her from elder abuse The abuse occurred in 2011 and 2013. Nothing was done for years, until her health collapsed.

The courts also pointed to what the record did show: the timing; no real change in how the assets were managed; the agent acting for both sides of the transaction; transfers that left the estate without enough cash to pay her bequests; and an attorney's email seeking a "deeper discount." The court called the stated reasons after-the-fact justifications, not actual motivations.

Why the Penalty Stuck

The estate also lost on the 20% penalty. A taxpayer can avoid it by showing reasonable cause and good faith, often by relying on professional advice. That defense failed here for two reasons:

• First, there was no evidence that any professional had advised reporting the partnership interest at a discount, or that the treatment was proper. Hiring professionals is not the same as relying on their advice about the specific position. 

• Second, the court said a $6 million reduction in value should have struck someone with the agent's background in finance and banking as "very possibly too good to be true."

For agents and executors, that is the uncomfortable part of the case. Having advisors in the room does not, by itself, protect the person who signs.

Late-Life Planning Draws the Closest Look

Fields reinforces a point we have discussed before in connection with late-life will changes and the "magical mystery tour" of litigation. Planning done in the shadow of serious illness or imminent death is examined more critically. Courts and agencies look past the documents to the substance of the transaction: the timing, who really controls the property, how it actually operates, and whether the stated purpose is believable. A structure that might hold up if set up years earlier can unravel when it is set up in the final weeks of life.

Medicaid asset protection trusts and other irrevocable trusts face similar questions under different law. A Medicaid agency is not applying section 2036. It applies a five-year look-back, a transfer penalty, and a test of whether the trust's assets are still an available resource. But the questions rhyme. A comfort clause that lets the trustee pay for the settlor's needs, or a pattern of using the trust as if nothing had changed, will be read the same way these courts read the partnership. A carefully drafted document is necessary, but rarely enough. Planning done when nursing-home care is near gets the hardest look.

The Agent's Exposure and the Family's Cost

When a strategy produces a large deficiency, a penalty, and big professional fees, disappointed beneficiaries look for someone to hold responsible. An agent who engineers a late-life transaction that fails can face claims that the strategy was imprudent, that it raised rather than lowered the estate's costs, or that it exposed the estate to avoidable interest and penalties.

Even an agent who acted on advice can be drawn into disputes over who pays the fees, how the extra tax is shared, and whether the agent should bear part of the loss personally. Those disputes generate their own legal bills, and they can fracture a family. It is the same unpredictable, expensive "magical mystery tour" that follows a contested deathbed will.

What to Do Instead

• Plan while capacity is clear and health is stable. Time is the best evidence of a real purpose.

• Write down the nontax reasons when you act. A reason documented at the time carries weight. A reason assembled for trial usually doesn't.

• Make the change real. If an entity or trust is supposed to change who controls or benefits from property, it has to actually operate that way.

• Keep enough outside the structure. Leave the person enough to live on, and the estate enough cash to pay its bills and bequests.

• Be wary of numbers that look too good. If a valuation discount seems like a windfall, get a second opinion before relying on it.

• Agents: get written advice on the specific step. Ask whether the power of attorney authorizes it, and whether it fits the principal's plan and best interests. General engagement of professionals is not enough.

Bottom Line

Fields does not announce a new rule. It applies long-standing substance-over-form principles to facts that are, unfortunately, not uncommon. A partnership formed five weeks before death, with no change in how anything was managed, saved nothing. It added a penalty, interest, legal fees, and years of uncertainty for the family.

The most reliable protection is the one we return to throughout this blog: thoughtful planning done early, documented carefully, and carried out so that the substance matches the form.

Sources: Estate of Anne Milner Fields v. Commissioner (5th Cir. 2026); ElderLawAnswers summary.

When an Estate Inherits an IRA: New IRS Guidance Allows Tax-Free Division into Separate Inherited IRAs

One of the most common and costly retirement-account mistakes is failing to identify beneficiaries on an IRA. When no beneficiary is designated (or the designation fails), the account passes to the decedent’s estate by default. That outcome usually produces worse required minimum distribution (RMD) rules and can create administrative headaches for the executor and the heirs. In PLR 202624001 (released February 20, 2026), the IRS confirmed a practical and taxpayer-friendly solution: an estate that inherits an IRA can divide the account into separate inherited IRAs for the individual beneficiaries named in the will, using trustee-to-trustee transfers, without triggering a taxable distribution.

The Facts of the RulingThe decedent owned a traditional IRA and died after reaching the age at which RMDs were required. No beneficiary designation was on file, so the estate became the sole beneficiary of the IRA. The decedent’s will left the residuary estate (including the IRA) equally to three children. 

The executor proposed to divide the IRA into three equal shares, and move each share by direct trustee-to-trustee transfer into a separate inherited IRA titled in the decedent’s name for the benefit of each child (as a beneficiary of the estate).  We'll discuss "why" the executor suggested this plan after reporting the ruling of the IRS.

What the IRS Ruled

The Service granted four favorable rulings.  The IRS ruled that:

• each beneficiary’s interest in the estate’s IRA may be segregated into separate IRAs for RMD purposes;

• the new accounts, properly titled and funded by trustee-to-trustee transfer, qualify as inherited IRAs under IRC § 408(d)(3);

• each beneficiary may take RMDs from his or her separate inherited IRA over the decedent’s remaining life expectancy (using the Single Life Table); and

• The trustee-to-trustee transfers themselves are not taxable distributions under § 408(d)(1) and are not treated as rollovers under § 408(d)(3).

In short, splitting the estate-owned IRA into separate inherited IRAs for the will beneficiaries does not create immediate income tax.

The Executor's Objectives

The main goals were administrative clarity, separate control, and cleaner tax reporting, while staying within the limited options available once the estate is the beneficiary.  Key benefits of the approved approach:

• Separate accounts for each beneficiary:  Each child receives their own inherited IRA. They can manage investments, take distributions, and deal with the custodian independently instead of everything flowing through the estate.
• Independent RMD tracking
  Each beneficiary satisfies the required minimum distribution rules from their own account. This avoids the need for the executor to calculate and distribute one combined RMD and then allocate it among the heirs.
• Avoids (or minimizes) estate-level income taxation
  When the IRA stays in the estate’s name, distributions are generally reported to the estate under its EIN. The estate may have to pay tax at compressed fiduciary rates if it retains the funds, or it must distribute the money out so the beneficiaries pick up the income. Splitting into separate inherited IRAs lets the income flow more directly to the individual beneficiaries.
• Non-taxable movement of the assets
  The IRS confirmed that the trustee-to-trustee transfers themselves are not taxable distributions and are not treated as rollovers. The tax is deferred until actual distributions are taken from the new inherited IRAs.
• Practical administration
  Once the separate inherited IRAs are established, the estate can close out its involvement with the retirement account more cleanly.

Note that the beneficiaries still had to use the decedent’s remaining life expectancy for RMDs. Because the estate (not the individuals) was the designated beneficiary, they could not use their own longer life expectancies or the more favorable 10-year rule that usually applies to designated individual beneficiaries.What If the Proposal Had Been Denied?

If the IRS had refused to allow the division into separate inherited IRAs, the practical and tax consequences would have been less favorable:

• The entire IRA would have remained titled in the name of the estate.
• All post-death distributions would be reported on Form 1099-R issued to the estate.
• The estate would include those amounts in its gross income (Form 1041).
  • If the estate retained the funds, it would pay tax at the compressed fiduciary income-tax rates (which reach the highest bracket very quickly).
  • If the estate distributed the money to the beneficiaries in the same year, the income could be passed out via Schedule K-1, but the timing and character still flow through the estate’s return first.
• The executor would have to continue administering the IRA as an estate asset, calculating the single RMD based on the decedent’s remaining life expectancy, and then allocating shares among the three children.
• Beneficiaries would have less direct control and more dependence on the estate administration process.
• There could be delays, extra accounting costs, and potential mismatches between when the estate receives the distribution and when the beneficiaries actually receive their shares.
• Alternately, the executor could have distributed the funds from the IRA, incurring immediate taxable consequences to either the estate or to the individual beneficiaries on the entire amount distributed, sacrificing any favorable tax deferral.

In short, the ruling gave the executor a clean, tax-free way to move from one estate-owned IRA to three separate inherited IRAs. That structure is administratively superior and generally more tax-efficient for the beneficiaries than leaving the account stuck inside the estate. It does not, however, improve the underlying RMD period; that limitation is locked in once the estate is the beneficiary. This is why proper beneficiary designations (or a qualifying look-through trust) remain far preferable to relying on this post-death rescue technique.

Why This Matters and Why It Is Still Second-BestThis guidance is helpful for executors who discover that an IRA has no designated beneficiary. It allows the estate to move the assets into individual inherited IRAs so each heir can manage his or her own share and satisfy RMDs independently.  The ruling, however, also underscores a critical limitation: because the estate was the beneficiary, the heirs are stuck with the decedent’s remaining life expectancy. They cannot use their own longer life expectancies, nor (in most post-SECURE Act cases) the more flexible 10-year rule that often applies to designated individual beneficiaries or qualifying look-through trusts. The result is typically faster forced distributions and higher income taxes over a shorter period.Planning Implications for Aging-in-Place and Elder Law ClientsThe following remain actionable and preferred planning tools:

• Name a Beneficiary:  A properly drafted see-through trust, but if not, an individual primary and contingent beneficiary or beneficiaries. The cleanest solution is still a direct beneficiary designation. This PLR is a rescue technique, not a preferred plan.

• Review Beneficiary Forms Regularly:  Marriage, divorce, births, deaths, and changes in relationships all require updates. Custodians’ default rules (often the estate) should never be left in place by accident.

• Coordinate the Will and Beneficiary Designations: Even when the will names the same people, the absence of a designation on the IRA form forces the slower, less favorable estate-as-beneficiary path.

• Executors should act promptly: Establishing the separate inherited IRAs and confirming the RMD method early reduces the risk of missed distributions or custodian resistance. Some custodians still prefer or require a PLR before allowing the split; this published ruling may ease that process.

• Consider the Income-tax Impact on the Heirs. Faster RMDs based on the decedent’s life expectancy can push beneficiaries into higher tax brackets, another reason to avoid estate-as-beneficiary status whenever possible.

Bottom Line

PLR 202624001 gives executors a clear, tax-free path to divide an estate-owned IRA into separate inherited IRAs for the individual heirs. That is welcome administrative relief. It does not, however, cure the underlying problem of a missing or failed beneficiary designation. The best protection remains proactive: keep beneficiary designations current, coordinate them with the overall estate plan, and avoid letting retirement accounts fall into the estate by default.

Clients who hold IRAs or other retirement accounts should review their beneficiary designations as part of any comprehensive aging-in-place or estate-planning update. A few minutes spent confirming those forms can save heirs both taxes and complications later.

Private Letter Ruling (PLR) 202624001 (released June 12, 2026).  

The Illinois Digital Asset Transaction Tax: Why Multi-State Tax Exposure Must Now Be Part of Every Financial Projection

In July 2026, Illinois became the first state to enact a dedicated tax on cryptocurrency and other digital-asset transactions. The Illinois Digital Asset Tax Act (IDATA) imposes a 0.2% levy on the value of digital assets involved in each covered transaction. The tax is scheduled to take effect in 2027.This development is more than a narrow cryptocurrency industry story. It is a concrete reminder that state tax systems are becoming more aggressive and creative, and that citizens and their advisors can no longer assume that only their state of residence will tax their financial activity.

The Nature of the Tax

IDATA is a transaction tax, not a traditional income tax or capital-gains tax. It is calculated on the value of the digital assets involved in the transaction itself, not upon gain or appreciation.  Because it is imposed on the transaction rather than on realized gain or ordinary income, conventional tax-planning techniques that focus on character of income, holding period, or realization events offer only limited protection. That distinction matters. A pure income or capital-gains tax can often be managed through timing, entity structure, or realization planning. A transaction tax is harder to avoid once the taxable event (the transfer or trade) occurs and is deemed to have a sufficient connection to the taxing state.

Why This Matters for Broader Financial and Estate Planning

IDATA illustrates a growing reality: states are increasingly willing to tax economic activity that has only a partial or temporary connection to their borders.  The risk of unexpected state-level taxation is no longer theoretical for clients who:

• Maintain accounts or wallets with platforms that have Illinois operations or customers;
• Spend significant time in multiple states;
• Engage in frequent trading or transfers; 
• Expect to make large transactions such as lifetime gifts or estate transfers at death; and/or
• Hold digital assets inside trusts or business entities.

Citizens and planners must now routinely include the possibility of taxation by other states in financial projections. Relying solely on the tax rules of the client’s home state is incomplete. Multi-state exposure, whether from income tax, capital-gains tax, transaction taxes, or new forms of digital-asset levies, should be treated as a standard planning variable.

Here are a few estate planning scenarios in which the IDATA could produce an unexpected levy:

• Lifetime Gifts: A retired Ohio executive makes a lifetime gift of $2 million in Bitcoin to his daughter, who lives in Chicago. When he instructs his exchange to transfer the coins from his account to hers, the platform, having nexus with Illinois and treating the daughter as an Illinois customer, collects the 0.2% tax on the full value, instantly reducing the gift.

• Trust Estate Distributions: A Missouri successor trustee distributes $1.5 million in Ethereum from a decedent’s exchange account to a beneficiary who resides in Illinois; the broker’s transfer again triggers the tax, quietly siphoning the tax from the inheritance before the assets ever reach the beneficiary. 

• Probate Estate Distributions:  Probate Administrations are where this tax can be particularly pernicious.  The tax can unexpectedly affect estates in other states and jurisdictions.  It also can result in unequal or inequitable distributions.   

Unequal Distributions: A Hidden Trap in Probate

Assume an Ohio decedent dies owning $900,000 of cryptocurrency held in a custodial account at a major exchange. The probate executor opens an estate account at the same exchange and transfers the entire $900,000 from the decedent’s wallet into the newly created estate wallet. Because the transfer occurs on the platform, the exchange processes it as a broker-mediated movement.

The will directs the executor to distribute the cryptocurrency in equal one-third shares ($300,000 each) to three adult children: Beneficiary A who lives in Illinois; Beneficiary B who lives in Ohio; and Beneficiary C who lives in Florida.  When the executor instructs the exchange to send $300,000 to each beneficiary’s personal wallet:

• The transfer to Beneficiary A (Illinois resident) is treated as a covered digital-asset transfer involving an Illinois customer. The exchange collects the Illinois Digital Asset Tax before completing the movement. Beneficiary A therefore receives less than the full distribution amount;
• The transfers to Beneficiaries B and C have no Illinois customer connection, so no Illinois transaction tax is withheld. Each receives the full distribution; and
• Even if it is not readily apparent to Beneficiary A at the time of the transaction that s/he received less, it will be obvious when the Final Account reports an amount for the distribution to Beneficiary A that differs from the amount the Beneficiary actually received.  

As a result, the three beneficiaries do not receive equal net amounts even though the will called for equal distributions. The Illinois resident bears a reduction solely because of IDATA, while the non-Illinois beneficiaries receive their full shares. The executor must then decide whether to equalize the difference from other estate assets or leave the disparity in place. 

Families focused on traditional income, gift, or estate taxes may discover only after the fact that a simple electronic movement of digital assets through a broker has generated an unanticipated transaction tax.  Differing and unexpected or unanticipated outcomes often mean controversy, conflict and contests.

Digital Assets Covered by the Digital Asset Tax:  Beyond Typical Cryptocurrencies

The IDATA defines a “digital asset” as: "a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not fiat currency."  This definition is intentionally broader than just Bitcoin, Ethereum, and similar cryptocurrencies. Based on the statutory language and analyses of the Act, the tax can reach the following categories (when they meet the medium-of-exchange/unit-of-account/store-of-value test and are handled by a covered broker):

Covered (or potentially covered) Beyond Standard Cryptocurrencies

Category	Status	Notes
Stablecoins (USDC, USDT, etc.)	Covered	Explicitly treated as digital assets; the statute pulls in instruments designed to maintain a stable nominal value.
Governance tokens	Generally covered	Function as store of value / medium of exchange within protocols.
Altcoins and other crypto tokens	Covered	Any token used as medium of exchange, unit of account, or store of value.
Meme coins	Covered	Specifically brought back into the definition even if they lack intrinsic utility.
Tokenized traditional assets (tokenized stocks, bonds, commodities, deposits, etc.)	Potentially covered	When the token itself is used as a medium of exchange, unit of account, or store of value.
Other blockchain-based representations of value used for investment or speculation	Covered	Broad residual category.

The following are the only digital assets explicitly excluded from (IDATA):

• Loyalty, affinity, or rewards program points;
• In-game currencies or items used primarily inside games;
• Digital art, music, literary works, collectibles, and similar items that have substantial value/utility beyond being a digital asset;
• Event tickets, licenses, and similar rights;
• Prepaid card balances; and
• Pure NFTs that function mainly as digital collectibles or art (rather than as a medium of exchange or store of value).

While the tax is commonly described as a “cryptocurrency tax,” it obviously reaches a wider set of digital representations of value, especially stablecoins, governance tokens, meme coins, and many other tokens, whenever they are exchanged, transferred, or stored by a digital asset broker on behalf of an Illinois customer. Pure digital collectibles and in-game items are generally outside its scope.

Although IDATA contains exclusions for certain digital items that are not marketed for investment or speculation, it expressly carves stablecoins back in. IDATA covers any digital representation of value that is “marketed, used, promoted, offered, or sold in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.” This language was written intending to capture stablecoins (USDC, USDT, DAI, and similar instruments pegged to the dollar or another reference asset).

Moreover, because stablecoins are designed to maintain a stable value, the tax is especially noticeable: the levy is imposed on the full face value even though the holder has little or no price appreciation. Stablecoins are treated the same as other covered digital assets: any exchange, transfer, or custodial storage of stablecoins by a digital asset broker on behalf of an Illinois customer can generate the transaction tax.

Planning Strategies

Although IDATA is structured as a transaction tax, several approaches may still limit its impact or the impact of similar future taxes:

• Entity and Ownership Structure:
  Holding digital assets through carefully designed entities or trusts may affect how (or whether) a state asserts taxing jurisdiction. The analysis is fact-specific and must consider both the state’s nexus rules and the client’s overall estate plan.

• Residency and Domicile Planning:
  Clear documentation of domicile and the limitation of days spent in high-tax or aggressive-tax states remains foundational. While a transaction tax can reach non-residents, strong residency evidence still helps in disputes over sourcing and nexus.

• Platform and Counterparty Selection:
  The identity and location of the exchange, broker, or counterparty can influence whether a state claims the transaction has a taxable connection. Clients and advisors should evaluate where platforms are based and how they report activity.

• Timing and Frequency of Transactions:
  Because the tax is imposed on each covered transaction, reducing unnecessary transfers or consolidating activity may lower the cumulative burden. High-frequency trading is particularly exposed.

• Monitoring Legislative and Constitutional Challenges:
  IDATA is already facing criticism and a proposed repeal bill. Similar future taxes may be challenged under the Commerce Clause, Due Process Clause, or other constitutional theories. Clients should stay informed and be prepared to adjust.

• Integration with Overall Tax Projections:   
  Financial models, retirement projections, and estate-tax estimates should now include sensitivity analyses for potential multi-state taxation of investment activity—not only for digital assets, but for other mobile forms of wealth as states continue to innovate.

Beginning of a Trend?

IDATA is the first of its kind, but it is unlikely to be the last. It signals that states are looking for new ways to tax financial activity that crosses borders. For individuals and families engaged in serious planning, the practical lesson is straightforward: possible taxation by other states must be included in financial projections. A transaction-based tax is more difficult to plan around than a conventional income or capital-gains tax, which makes early awareness and structural planning all the more important. Clients who treat multi-state tax risk as an afterthought may discover that the cost of a single state’s policy choice is far higher than expected.

If you or your clients hold cryptocurrency, stablecoins, or other digital assets, do not wait for the first unexpected levy to appear. Review where those assets are held, how they will move at death or during lifetime gifting, and whether any beneficiary or platform connection could create Illinois tax exposure. A short conversation with your estate planning attorney now can prevent unequal distributions, family conflict, and avoidable costs later. The Illinois Digital Asset Tax is already law; planning around it should begin before it takes effect.