[Masthead] Fair ~ 54°F  
High: 69°F ~ Low: 48°F
Thursday, May 5, 2016

Changes to estate tax requires planning for family farmers

Monday, December 20, 2010

Farm families across the country have been closely watching politics in Washington, D.C., lately, knowing that if the current tax law was allowed to go into affect, passing on the family farm to the next generation could become much more complicated.

However, on Friday, U.S. president Barack Obama signed a federal tax bill which will allow estates of $5 million per person and $10 million per couple to pass to heirs tax-free through 2012.

Amounts over those limits will be taxed at 35 percent.

Many Democrats had complained about this provision in the bill, preferring a lower amount of $3.5 million or $7 million per couple and a 45 percent tax rate.

According to Saline County Probate Judge Hugh Harvey, even with rising land prices, either rate would have been high enough to exempt most Saline County farm owners and local businesses with proper estate planning.

"I would think that $3.5 to $5 million either way is reasonable for the farmers in this area," he said. "It's reasonable for us in this area but I can't speak for Iowa or Illinois where ground is going for $11,000 potentially $12,000 an acre, think about how fast it gets to those levels up there."

The concern for farmers stemmed from expiration of the so-called "Bush tax cuts" passed in 2001, which would have meant the inheritance tax level would go down to $1 million per person or $2 million a couple and a 55 percent tax rate on Jan. 1, 2011.

According to Harvey, that would have affected most of Saline County's full-time farmers, as agricultural land prices have increased and sometimes doubled in recent years. Recent land sales in the area have ranged from $1,500 per acre to over $7,000 per acre.

"There is farm ground bringing $5,000 an acre," he said. "That's not hard to do."

Depending on the land value, a person inheriting the land could potentially have to sell some of it to pay the taxes, especially if the $1 million threshold would have gone into effect.

"A 300- or 400-acre farm and you're in real trouble quick, you are going to end up selling some of it," explained Harvey.

The average farm size in Saline County is more than 400 acres, according to the 2007 Farm Census.

"How many people do you know that are full-time farmers farming less than 300 acres of ground -- full time now -- and make their living owning less than 300 acres? There are a few, but I think it is going to affect majority," said Harvey.

Although Harvey acknowledges it sounds like a lot of money to the average American, for a farm family, land is an "untouchable" asset.

"The sad thing part about farming to me is you work your whole life, you build up all that net worth, but you really can't tap it, because if you do you are destroying a part of what you used to build your net worth," said Harvey, who was raised on a cattle and grain farm in the county. "It's kind of the irony of farming."

In fact, according to Harvey, putting taxable inheritance at too low of levels would encourage larger corporate farms, which don't face estate taxes, effectively penalizing family farms.

"I think it is sad enough more youth can't go back into farming -- it is a great way of life if you are built that way," he said. "But if you have 500 acres and didn't have the perfect plan, you could have to sell part of it."

"The general public doesn't stop to think about how this really affects the farm family," he said. "If you do it for a living, 100 or 200 acres won't support a family."

An ironic part of the 2001 package called for no limit on inheritance rates in 2010, something Harvey and others thought Congress would change before it was allowed to go into affect.

However, it didn't.

In fact, at least four U.S. billionaires, including New York Yankees owner George Steinbrenner, passed away in 2010, saving their families more than $1 billion in taxes.

In Steinbrenner's case, his family saved over $500 million because he passed away in July 2010, as opposed to 2009, when the non-taxable inheritance limit was $3.5 million per spouse.

"I was doing these seminars saying they'll certainly come in and change that -- and they didn't," said Harvey. "So as I give people examples, George Steinbrenner passes away and leaves a billion dollar estate tax free this year because it was unlimited," said Harvey.

The original so-called "Bush tax cut" bill passed in 2001, and set up a a structured increase for the estate tax, increasing by about $500,000 per year.

"It started out at $1.5 million up to $3.5 million two years ago and then this year it was unlimited," explained Harvey.

One downside to the unlimited inheritance for farmers meant that those who inherited property in 2009 did not get a "step up in basis," which allows the land to be revalued for the new owner's estate to current value levels.

Some believed the Congress would pass a provision making the tax law retroactive to 2010, but that apparently it is not part of the bill the president signed last week.

"I really never believed that our goverment would let something like that happen," he said, noting the other irony if the new bill hadn't passed.

"Steinbrenner can pass a billion dollar estate and six months later some farm widow who has 500 acres in Illinois could end up having to sell half of it to pay the tax."

If no more legislation is passed, the levels are scheduled to go back to $1 million in 2013.

Harvey cautions landowners to plan ahead when it comes to their estate. He encourages them to see a tax-planning attorney and/or an accountant who can help with planning.

"My advice to farm families is don't wait. Get in, get a plan, outline where you are at and then have it reviewed periodically," he said. "It's tough even with good planning."

He said one of the big mistakes is to wait until you are in your "senior years" to try to go and plan all of a sudden, because a good estate plan could take several years to develop.

"A classic that I've seen is one spouse passes away and another one runs in to see a lawyer. You just lost half your claim," he said. "If you've been farming for 20 or 30 years and you've accumulated land and equipment and some capital and you are in your 50s you certainly ought to be seeing an accountant/and or an attorney for the future of your children."

Contact Marcia Gorrell at


Respond to this story

Posting a comment requires free registration:

Related subjects