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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Is an Unlimited Estate Tax Exemption for Farm Estates Harmful?

Sep 10, 2010

I came across an article put out by the Center on Budget and Policy Priorities from Washington DC.  The gist of the article was that having an unlimed estate tax exemption for farm estates is unnecessary and likely harmful.  The focus of the article is that this policy would create 3 harmful situations:

  1. First, according to the article, there is overwhelming evidence that the estate tax does not pose a significant problem for farmers.  The Urban Institute-Brookings Institution Tax Policy Center estimated there would be fewer than 110 small farm estates for 2011 if we used the 2009 estate tax exemption of $3.5 million (their definition of small farm estate is less than $5 million in assets or less than 1,000 acres of good Iowa farmland).
  2. Second, an unlimited exemption for farmland would promote tax sheltering by giving wealthy individuals whose primary occupation is not farming a strong incentive to sell financial assets and purchase large tracts of farm land to avoid paying the tax.
  3. Third, an unlimited farmland exemption could hurt ordinary farmers by driving up the price of farmland as wealthy individuals buy farmland for use as an estate tax shelter.  This would make it harder for young aspiring farmers to enter the farming industry and for families to hold onto true family farms.

Remember that these are their conclusions, not necessarily mine.

My comments are as follows:

  • They stated that estate tax opponents have not been able to come up with one case where the estate tax forced a family farm to be sold.  I would be curious to hear from my readers if they have any experience of a family farm being sold because of the estate tax.
  • Their definition of a small farm being less than $5 million in today's environment very likely understates what I would consider to be a family farm anymore.  Many typical family farms these days have at least 1,500 to 2,000 acres of owned land plus equipment and other non-farm assets.  This could very easily result in a taxable estate of $10 - $15 million or more.  Under this scenario, the estate tax using 2009 rates could be in excess of $5 million.
  • There are several estate tax provisions to reduce or defer the amount of tax that a farm family would owe, but these items have not been indexed with inflation and the value has decreased dramatically with the rise in farmland prices.
  • The one conclusion that I probably agree with the most is that it would promote a desire by wealthy families to invest substantially in farmland to escape estate taxes.  This would drive up the value of farmland leading to much higher cash rents, etc.  I would not be in favor of exempting only farmland for that reason.  If all small businesses were exempted, then the effect would be much more minor.

My personal opinion is that I would like to see an estate tax exemption in the $3.5 to $5 million range for each spouse and allow this exemption to be combined in any manner that the family chooses.  We will most likely see a new estate law sometime in the next year or so, but who really knows what it will look like.

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