Farmers keep close eye on expiring estate tax
Lost in the current Beltway din about tax rates on the rise and mandatory spending cuts set to happen in 2013 is the expansion of the estate tax, which could impact family farms across the country in a big way.
If nothing changes, starting Jan. 1, the exemption from the estate tax—also known as the death tax—will drop from the current $5 million level to $1 million. The tax kicks in when a person dies and passes his or her money and property to another.
Family farms are disproportionately vulnerable to the tax, since most of their value—used to determine whether the estate tax applies or not—is in the land used for farming. Farming businesses are often described as “land rich and cash poor.”
“Potentially it’s harmful to them, because they’re probably the most illiquid group of businesses around,” said estate tax attorney James Littlepage, who counts many farming and ranching clients in the area.
As Littlepage explained, when the owner of a farm dies, if the estate tax applies, it is due in cash within nine months. There is a marital deduction, so farms can be left to a spouse with little or no impact.
But when the farm changes hands to the next generation, surviving family members often face a tall tax bill.
The ranches and farms of Mesa County are susceptible to the new tax threshold. The impending lowering of the exemption to $1 million will catch 227 local farms, compared to just 22 farms that faced the tax under the old exemption, according to the most recent available U.S. Census data from 2007.
Of the more than 37,000 farms in Colorado, 8,790 are valued at more than $1 million, versus 1,194 that exceed $5 million, according to the most recent numbers.
An analysis by Senate Republicans estimated more than 420,000 farms nationwide are at risk of being lumped into the estate tax mix. That same report cited soaring farm real estate values as contributing to the impact.
Adding another layer, the amount the federal government intends to collect on the estate tax is set to jump, too—from a top rate today of 35 percent to more than half, at 55 percent, next year.
Of course, it’s Littlepage’s job to help farmers and ranchers avoid the estate tax, which he says is possible in nearly all cases—with some early and strategic planning.
“It’s really a tax you can avoid, if you’re young enough and careful enough,” Littlepage said. He said a common tool is setting up “family limited partnerships,” which give shares to other family members while the property owner is still alive.
He said he recently saved a bundle for a family in Montrose who were looking at a tax bill of nearly $6 million.
“Through a number of devices, they’re down to, like, nothing, or very close to it,” he said.
With negotiations reportedly ongoing, in advance of this and other tax increases set to hit at the first of the year, it’s still possible that the coming estate tax exemption plunge could change as part of a budget deal.
Littlepage said President Obama once expressed that he could “live with” lowering the exemption to $3.5 million. That could provide a marker for a potential compromise. “I suspect the Republicans will probably jump at that ($3.5 million exemption),” Littlepage said.