Resurrecting the death tax

Sep 24, 2010
by DTN

One minute past midnight, Dec. 31, 2010, the amount of taxes your heirs will pay goes from zero to a top rate of 55 percent. Would that be enough of a tax bill to drop the ax on the farm as family members are forced to sell a lifetime of work off in pieces to pay Uncle Sam?

The countdown of legislative days left for Congress to act on this impending train wreck is down to about two weeks. Farm groups like the National Cattlemen’s Beef Association (NCBA) and American Farm Bureau have been sounding the alarm for a while now. But it looks like Congress is playing a dangerous game of chicken, with the only thing standing between Americans and a 55 percent estate tax being a possible lame duck session after elections in November.

Colin Woodall, executive director of legislative affairs for NCBA in Washington, says as things stand today, the estate tax, or death tax, will revert to pre-2001 levels January 2011. Those tax rates are graduated, with 55 percent being the top bracket for taxable amounts above $3 million. A $1 million estate would see rates around 41 percent. That’s a pretty wide net when you look at most farms and ranches. Today’s high land values have helped create businesses that may be assetrich on the books, but are often cash-poor. When presented with a large tax bill, these operations often have to liquidate.

The fact that estate taxes ever zeroed-out still mystifies many who don’t understand Congress giving up that much income. Darrell Dunteman, a well-known agricultural financial consultant and accountant in Illinois, works with a large, ag-based clientele. He says he’s always believed that at the end of the day, there would be a $3.5 million exemption, but he’s not sure where the rest of the issue is headed.

“I never thought Congress would give up a whole year’s revenue,” he says. “They could still do something, but they are losing opportunities. Estates taxes are due nine months after the date of death. So for someone who died in January 2010, we are there. That estate has escaped. One of the better-known estates they missed out on was George Steinbrenner’s. This was a multi-billiondollar estate they received no income from, at a time when the federal deficit is ballooning.”

Dunteman says until recently, he thought there was every possibility that nothing would happen to rectify the tax issue this year. Now he’s not so sure, saying he senses some political momentum growing.

“The way the wind is blowing, I think we’ll see Democrats joining in the effort to do something here. Will they do it before the election? It’s possible we may see some of the Democrats use this to make a statement and gain votes.”

Dunteman adds there’s a lot more than the rate of the death tax to watch here. He points to the possible expansion of code 2032A, where farm ground is taxed on its productive value as opposed to its fair market value. One proposal allows the amount an estate could be reduced by go to $3 million from the current $1 million. Estates must qualify for this reduction, part of which means they should be 50 percent closely held and real estate must make up at least 25 percent of the estate.

“Right now, I think we are going to see relief, probably at the $3.5 million level with some type of an extension. I think we’ll see the stepped-up basis intact. But there hasn’t been any bill written addressing capital gains issues; unless Congress acts on that, those rates would go to pre-2001 levels, 28 percent preferential.”

He also says he hopes that wherever estate taxes end up, Congress doesn’t change the installment payment plan (Code Section 6166). There is currently no provision before Congress to change this. “You still have to pay the taxes, but it’s over time and with interest,” explains Dunteman. “Right now, looking at the interest rates we have, that softens the blow a little bit.”

NCBA’s Woodall adds he’s not looking for the lesser of two taxes; he wants permanent and full repeal of the death tax.

“We’ve been pursuing final elimination of this tax for many, many years,” he says. “This is the only way to foster long-term sustainability of cattle operations and farms, and ultimately relieve producers from this hefty taxation at the time of death. Most of the time, these assets have already faced taxes two and three times over the course of a lifetime. Opponents to complete repeal would like us to believe that an exemption rate of $3 million, $5 million or even $7 million will cover almost every family farm or ranch. This is not the case with land and property values the way they are today.”

Nebraska rancher Bill Rishel concurs. He says this is about preserving the legacy of American agriculture for future generations; it should not be a political issue at all.

“If we want to keep the next generation on family farms and ranches to provide food for the growing population, the government needs to stop regulating them out of business,” he says. “This death tax is a regulation as far as I see it. This is truly ruining family farms. It is disheartening to watch family ranches developed into subdivisions because the death tax left ranch owners with no alternative.” — Victoria Myers, DTN