One thing about the federal estate tax, affectionately known as the death tax, is that it's not going to die. The tax is scheduled to go away for one year in 2010, but current provisions expire next year, making the repeal only temporary. The resurrected tax will carry more bite in 2011 as the exemption level drops from the current $3.5 million per person to $1 million and the top rate reverts to 55% from the 45% level in 2009.
This not only creates uncertainty for financial planning, but also raises concern regarding the disparate treatment of similar estates depending on the date of death, says Ron Durst, USDA Economic Research Service (ERS) economist. If a person dies on Jan. 1, 2011, the family could owe considerably more than if the death came a few days earlier, he says.
The reversion to previous levels means that about 2.5% more estates will have to pay the tax, according to ERS analysis. Since 2000, farm equity has more than doubled, primarily due to the increasing value of farm real estate. Farmland values alone have jumped by an average of 14% annually since 2004.
As a result, under current law, it is estimated that as many as 1 out of 10 farm estates would owe estate tax in 2011, Durst says. Total payments could increase to about $2.55 billion—nearly 300% more than farm estates are expected to owe in 2009.
Tax law volatility over the past five years alone should be enough impetus for farmers to set up a solid estate plan, says Rob Holcomb, University of Minnesota Extension educator in agriculture business management. There are a number of options available to lessen the burden, including certain types of trusts that can split assets and double applicable federal exclusions.
As for 2010, even if there is no federal estate tax on farm estates, nearly every state has its own estate tax, Holcomb says.
Legislative Efforts. There are attempts to address the estate tax situation in 2010 and beyond, but those are behind other pieces of legislation in the House, according to House Ways and Means Committee Chairman Charles Rangel (D-N.Y.). That's key, since any tax legislation needs to originate in his panel.
A bipartisan group of lawmakers is pushing a multiyear plan that would see the exemption level rise gradually to $5 million per person and the tax rate decline to 35%. Given current assumptions in the budget, that would produce a cost.
However, efforts to extend 2009 rates for one year would actually produce budget savings by bringing tax revenues in 2010. With the budget deficit building, it's unlikely any support for a multiyear fix that some view as a break for the rich will make much headway.
Top Producer, December 2009
- DECEMBER 2009