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Monday, May 18, 2009

Is The Federal Estate Tax An Issue For You?


Farmers visiting with their Congressional representatives have usually found the opportunity to call for elimination of the Estate Tax, or “Death Tax” in the current vernacular. With farm estates including millions of dollars worth of farmland and machinery, there is a fear that Uncle Sam will take so much of the value that the next generation will have insufficient assets to carry on the family farm. Although the exemption has been rising and tax rate declining, it will all change next year with a repeal of the Estate Tax, and a renewal of the tax in 2011 with a low exemption and a high rate. Is the federal Estate Tax an issue for your farming operation?

As the Estate Tax exemption climbed from $675,000 in 2001 to $3,500,000 this year, fewer farm estates were impacted by the tax. USDA economist Ron Durst, writing in the electronic newsletter Amber Waves, says “...their potential effect on farmers and other small business owners has been a major concern among policymakers. These groups are more likely than the general public to owe estate taxes,...” Durst says Congress over the years has tried to make the Estate Tax less onerous by allowing farmland to be taxed at its farm use value, rather than fair market value, in addition to an installment provision, and a deduction for family owned businesses. Other provisions will become effective next year, with the repeal of the tax. However, at the end of 2010, the situation is set to be comparable to Cinderella at midnight when her coach turned back into a pumpkin. The Estate Tax rate will jump from 45% to 55% and the exemption will revert to $1,000,000.

Economist Durst says the IRS does little Estate Tax business, but knows farmers quite well, “About 9,600 estates (0.4 percent of all estates) are expected to owe Federal estate tax in 2009. The estates of small business owners are about twice as likely as the typical estate to owe tax, and farm estates are even more likely to owe tax, primarily because of their land holdings.” He says the current year will see 2.9% of farm estate owing the tax, expected to average about $1.1 million. A commercial farm is 10 times more likely to owe Federal Estate Taxes than other farms, and 10% of farms with annual sales over $250,000 will likely owe the tax. While commercial farm estates account for only 6% of all farm estates, they pay nearly 40% of Estate Taxes.

The scheduled repeal of the tax next year and the re-establishment of the tax in 2011 create uncertainty, says Durst, “but it also raises concerns regarding the disparate treatment of similar estates depending upon the date of death. The family of a person who dies on January 1, 2011, could owe considerably more than the heirs of a person dying a few days earlier.” Durst says at the same time the tax rate and exemptions are going against a farm estate, the estate itself has gotten much larger with higher land values, and greater equity. As a result, an estimate one out of every 10 farm estates would owe the tax in 2011, which are estimated at more than two and a half billion dollars.

The meteoric rise in farmland values in the past several years will be one of the more troubling issues for heirs in farm estates under the law that takes effect in 2011. Previously, the valuation process eliminated the increased value of the land that was typically held for long periods of time. However, beginning in 2011, the amount of value appreciation to be exempted will be limited. Additionally, the change will require the determination of asset values at the time they were acquired many years before. That will be a particularly challenging compliance issue for many families of farms that may have been acquired several generations earlier.

The USDA economist says the proposed federal budget for 2010 would retain the $3.5 million exemption, along with the 45% tax rate, and retain the stepped up basis treatment for inherited assets, which would mean status quo for farm families that experience estate transfers in 2011 and beyond. While it is not the total repeal of the Estate Tax that many farm families advocate, it would reduce some of the uncertainty.

The federal Estate Tax hits hard at many commercial farms, which are more likely to pay the tax than other farms and most other estates. The tax is scheduled for complete repeal in 2010, but re-establishment in 2011 at higher tax rates and lesser exemptions, which would capture many farm estates that have higher values from land prices and greater equity. A proposal for the next federal fiscal year would keep the current tax rate, exemptions, and most rules in place, instead of the more onerous provisions being restored in 2011.

Posted by Stu Ellis on 05/18 at 01:26 AM | Permalink

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