Most people don’t recognize the correlation between the federal estate tax and the U.S. agriculture industry.
But the value of this tax is of extreme importance to owners of family farms and ranches.
The federal estate tax, commonly referred to as the “death tax,” is scheduled to expire at the end of the year. At stake for farm families across the nation are tax exemptions, or relief from tax burdens, that affect their ability to maintain inherited farmland.
More than 90 percent of today’s U.S. farms are family farms.
As defined by the IRS, the death tax is a tax on one’s ability to transfer property. It originated in 1917 to aid in World War I costs.
As it currently stands, when family members inherit a family farm, these individuals incur the same inheritance tax breaks as their predecessor. But if legislation isn’t renewed, these assets will not be transferred. New taxes will be enacted that have the potential to damage the financial security of our country’s farm owners.
If congressional action is not taken, the exemption would drop from $3.5 million to $1 million with a top rate of 55 percent. New proposals that could replace the tax are not indexed for inflation.
“By not indexing the death tax for inflation, we are simply ensuring it’s going to have a negative impact on families, farmers and small businesses in the near future,” said Congressman Aaron Schock, R-Ill.
The issue is heated. Why? This tax generates an estimated $1 trillion a decade for the U.S. economy.
Proponents claim that family-farm owners should be required to pay more taxes on inherited land and that estimates about the potential for economic loss are exaggerated. They reason that the estate tax prevents the perpetuation of wealth and is a better source of federal revenue than the income tax, which is said to directly disincentivize work.
Opponents of the estate tax argue that farm owners are “asset rich but cash poor,” meaning that farm inheritors may have significant documented wealth (land value), but this wealth is used as a tool to perform business and generate profit and cannot be considered as excess money.
Many assert that inheritors are sometimes forced to cede land to afford their newly acquired property taxes.
Escalating land prices easily make the majority of farms and ranches well more than the $1 million exemption, states a NorthernAg.net story. Most farmers and ranchers desire an increased death-tax exemption level and a decreased rate.
“Without some leeway, farm lobbyists argue, portions of family farms — some in the same family for more than 100 years — would have to be sold just to cover the taxes,” states an editorial in Jacksonville's Journal Courier.
In the process, the U.S Department of Agriculture estimates, one in every 10 family farms would face a tax burden when changing hands. The American Farm Bureau Federation has asked for the exemption to be raised to at least $5 million.
“The 2011 change to the estate tax law does a disservice to agriculture because we are a land-based, capital-intensive industry with few options for paying estate taxes when they come due. The current state of our economy, coupled with the uncertain nature of estate tax liabilities make it difficult for family-owned farms and ranches to make sound business decisions,” said Montana Farm Bureau Federation Bob Hanson.
Currently, lawmakers from states with vested interests in agriculture are lobbying for death-tax modifications.
Montana Farm Bureau Federation Young Farmer and Rancher Chair Peter Taylor said, “It’s extremely important that we explain to our senators, the media and the public how this tax will eliminate the next generation taking over America’s productive farms and ranches.”
*Photo obtained from www.michiganestateplanninglawblog.com
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