Delta farms have become larger and more valuable in the last decade, in the process creating sizeable landowner estates. While dying is something no one likes to think about, the federal estate tax — known to many as the “death tax” — can cause serious complications for Delta farm families and result in huge tax liabilities for heirs.
The current estate tax will “sunset” in 2011 unless Congress passes a permanent repeal. Without a successful repeal, this tax will severely reduce exemptions and impose significantly increased tax rates.
The estate tax is one of the potential revenue sources that will fund new spending of government programs. The tax was designed to be imposed on the rich, but many American farm families who have worked hard to build their operations may have to sell out to pay the taxes.
Two factors make family-owned operations highly susceptible if the estate tax is not permanently repealed: (1) farms have increased in size to justify the cost of inputs and remain competitive; and (2) the value of productive agricultural land has appreciated 10 percent to 18 percent per year (based on recent appraisals).
On average, land values have effectively doubled since the tax-relief package was passed in 2001. The increased acres combined with the increased value present significant problems for estate values if this bill is allowed to sunset.
It is important to understand how allowing the current legislation to sunset will affect family farms. The estate tax was initiated in 1916 to fund World War I. Ninety-one percent of all businesses in the United States are small businesses — which include family-owned farms.
In 2001, revisions were made because many of the small businesses and farms were adversely affected by the existing legislation. Information from www.deathtax.com showed that more than 70 percent of family businesses could not survive a second generation and 87 percent could not make the third generation.
In 1998, the estate tax generated a little over 1 percent of the government’s revenue. Eighty-nine percent of the taxes came from estates that were $2.5 million or less in size and the tax rate ranged from 37 percent to 55 percent.
Currently, due to the 2001 revision, the first $2 million of assets is exempt and anything above that level is taxed at 45 percent.
In 2009, the first $3.5 million will be exempt and anything above that level will be taxed at 45 percent.
In 2010, the exemption will be repealed and there will be 0 percent taxes.
If the bill is allowed to sunset, in 2011 the exemption reverts to $1 million and the tax rate will go up to 55 percent.
To exemplify how this can affect a family farm, look at how the varying estate tax rates over the next three years impact a 2,500-acre farm valued at $2,500 per acre. With structural improvements and equipment accounting for an additional 15 percent of value, the total estate would be worth $7,187,500.
If the farm owner died in 2009 without a spouse, the estate would be taxed at the 45 percent level or $2,334,375 [subtract the exemption ($2 million) from the total estate ($7,187,500)].
If the farmer dies in 2010, there would be no exclusion and zero taxes.
However, if he dies in 2011 and the current tax relief package is allowed to “sunset,” the exemption reverts to $1 million and the tax rate becomes 55 percent. The tax liability increases to $3,403,125.
For the farmer who has worked all of his life to assemble a sizable, debt-free estate to pass on to his heirs, this is a serious wake-up call. If he dies in 2011, he actually passes on a debt of $3,403,125. The best of farms cannot service that amount of debt.
Social Security, Medicare and the recent bailouts are all putting financial stress on current and future taxpayers. Most Americans will see their benefits reduced and taxes increased because of government overspending.
Farmers make up less than 1 percent of the U.S population and the American public may be much less sympathetic toward farm tax relief.
The complexity of estate taxes has driven the growth of a vast array of support services to assist clients with their management. Services include insurance, combining husband and wife tax exemption limits, living trusts and estate planning. Many law firms also specialize is estate planning, tax avoidance, and minimization of estate taxes.
Farmers must deal with this situation or see the American family farm become a thing of the past.
Pepper, a retired Extension Service agent with over 30 years of agricultural experience, is an Accredited Rural Appraiser, the highest level of accreditation offered through the American Society of Farm Managers and Rural Appraisers.