Future is hazy for death and taxes

Oct 1, 2010

Death and taxes—two things you can’t escape, according to the old proverb. For many families in agriculture, the two go hand in hand.

The so-called death tax, or—more politically correctly—estate tax, is levied on the assets of a person who dies, when the assets are transferred to another. For farm and ranch families, the assets are usually in the form of land, machinery and livestock. When one member of a couple dies, the surviving spouse is responsible for the estate taxes. The family may end up paying estate taxes on the same property over and over, every time a member of the family dies.

This means Jodie Hickman’s family paid the estate tax on their ranch when her grandfather died, and on the same property when her grandmother died. "We sold land to pay the death tax," Hickman said. The family ranches in central South Dakota and Texas. "This is one of the leading causes of the breakup of family farms and ranches. It’s important for Congress to act quickly to provide certainty so family farmers and ranchers can plan for the future," Hickman said.

As far as the estate tax goes, 2010 is the year to die. This year is the culmination of a plan put into place by the Bush administration in 2001 to repeal the estate tax. Every year for the last nine years, the exemption for an estate has gone up and the rate at which it is taxed has gone down. This year, the estate tax was eliminated completely.

However, under the legislation repealing the estate tax, if the legislation wasn’t revisited in 2010, the estate tax would revert to the pre-2001 exemption level of $1 million in value per person and a tax rate of 55 percent. For instance, if a couple had an estate valued at $5 million when they both died, their heirs would pay 55 percent of $3 million in taxes—$1.65 million. For asset-rich and cash-poor farming and ranching families, this can cause some major financial hardships that can lead to the sale of a generations-old agriculture operation that is producing food and fiber for the world.

Colin Woodall, vice president of government affairs for the National Cattlemen’s Beef Association (NCBA), said NCBA has been working on this issue for 20 years. He says it looks like the estate tax won’t be addressed before Congress recesses for campaigns and elections, but he’s hoping some relief may come during the lame duck session, after elections and before new inaugurations.

"This is going to hit a good chunk of agriculture. We’re looking to see some relief from Congress. It doesn’t take an operation of very big size to hit that million dollars," Woodall said.

"This administration has been focused on maintaining tax cuts for those who make less than $250,000. The death tax isn’t usually considered when maintaining tax cuts. We want to work with members of Congress to make sure they understand this is a high priority and we want to get something done," Woodall said.

NCBA is advocating for legislation that either exempts land that is kept in production agriculture from the estate tax, or creates higher value exemptions for ag land. According to NCBA, "Farmers and ranchers believe exemption from the estate tax should cover all producers, thus, legislation should not include means testing through adjusted gross income limits or other exclusions precluding portions of the industry."

According to Woodall, South Dakota’s congressional delegation is mixed on the issue. Sen. John Thune, R-SD, has been supporting of NCBA’s efforts. "Sen. Johnson has voted against death tax relief every time it has come up. He has been actively against us on this," Woodall says.

Sen. Tim Johnson’s, D-SD, office has a different take on it. "The senator would like to see action on this issue sooner rather than later to provide certainty to families that are planning for their estates. Although he would consider any fiscally responsible proposal put forth in the Senate, Sen. Johnson favors reinstating exemptions for the upcoming year to $3.5 million per person and $7 million per couple," said Jeff Gohringer, Johnson’s deputy communications director.

The uncertainty is one of the things that has been hardest for families in agriculture. Estate planning has become a necessary part of doing business, but it is expensive, especially when the conditions that have to be planned for change yearly.

Scott Jones, a fourth-generation rancher from Midland, SD, says the changes to the estate tax, followed by the void that looms in 2011, have caused some major headaches and heartaches for his family. The Jones family started paying estate taxes when his great-grandfather died in 1949. Since then, the family has paid estate taxes when his great-aunt died and when his grandparents died—all on essentially the same assets, on which they also pay property taxes. "I have no idea how much money my family has paid in estate taxes, but I’m tired of it," Jones said.

Jones, whose parents and son are all active on the ranch, said his family has formed a limited liability corporation in hopes of offsetting the expenses of an estate tax. They also maintain a large life insurance policy on his dad, to provide some liquid assets to pay for any estate taxes they do incur. "Between the filing fees, the legal fees and the insurance premium, it adds up to some substantial dollars. This is money that could sure be used for improvements, or to bring the next generation into the business," Jones said.

"The uncertainty is an issue because nobody knows how to plan for after Dec. 31. You just don’t know where you stand and you don’t know if your plan is going to work or if it’s going to be adequate. At this point, you’ve got to plan for the worst case scenario, which is reverting back to the $1 million exemption and 55 percent tax. I can’t believe they’d let it happen, but if it does, it’s going to catch almost everybody, unless you’re a hobby farmer," Jones said.

In Jones’ part of the world, the $1 million exemption would allow for about 2,000 to 3,000 acres of land at current prices. "That’s not a very big estate. That’s not enough for a family—especially a multi-generational family—to make much of a living on," he said.

"The best thing would be complete repeal. That’s what it should be. The opponents of repeal claim we can’t afford it; we need the tax revenue. That’s baloney because we don’t have a taxing problem, we have a spending problem. For the little revenue the estate tax brings in, you can’t tell me there can’t be some spending cuts to offset that. I think the exemption needs to be $5 million per spouse. There are a lot of family operations that still would be subject to the estate tax even at that rate. Also, it’s got to be indexed to inflation," Jones said.

The most important thing, Jones, Woodall and Hickman agreed, is to get Congress to do something about the uncertainty ahead for the estate tax. "I guess that’s the biggest thing," Jones said. "Call your legislators and demand that they fix the problem. Congress has got to hear from people out in the country." — Maria E. Tussing, WLJ Correspondent