This%is%an%accounting%paper%written%by%a%graduate%student.%He%asked%me%to%look%over%it%and%make%copyediting%and%mild%substantive%editing%suggestions.%%

Brett Andrews

PFP 6080

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EstateTaxesandFamilyFarms

Introduction

AroundthistimeofyearIstartgettingalotoftaxquestionsfrommyfriends.Theyknow

thatI’mstudyingaccountingandusemeasataxresource.AlthoughI’mdefinitelynotan

expert,mostquestionsaresimpleones:ShouldIfilethisyear?or,WhatistheAmerican

opportunitycredit?MostofthetimeIalreadyknowtheanswertothequestionorknowwhere

tofinditeasily.Recentlythough,Ihadaquestionthatwasalittlemorechallenging.Agood

friendapproachedme,shewasalittlefrustrated,hergrandparentshadbeentransferringsome

sharesintheirfarmtohereveryyear,andshewaspayingtaxesontheincome—incomethat

shewasnotreceiving.Shedidn’tunderstandwhyhergrandparentshadbeendoingthat,she

thoughtitwasjustsometrickywayforthemtoavoidpayingtaxes.

SinceIknewalittleaboutestatetaxplanningIwasabletorecognizethattheywere

giftingthoseinsmallamountsofthefarmtohereveryyearinordertoeliminateoratleast

lessentheestatetaxburdensheandtherestofherfamilywillbesubjecttowhenher

grandparentspassaway.Iwasabletoexplaintoherthat,whilehergrandparentsaredoingthis

toavoidpayingtaxes,it’snotfortheirbenefitit’sforhers.Sinceatthetimemyknowledgeon

estatetaxplanningwaslimitedIdecidedtodoalittleresearchonitinordertogetabetter

understandingonestatetaxesforfamilyfarms.

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TheHistoryofEstateTaxes

TheestatetaxwasbornwhencongresspassedtheRevenueActof1916.Thepurposeof

thetaxwastoraiserevenueandshiftmoreofthetaxburdentothewealthy.Theestatetaxhas

gonethroughmanychangessince;perhapsthemostsignificantchangewastheTaxReformAct

of1976.TheTaxReformActof1976unifiedtheestateandgifttaxframework.Priorto1976

wealthytaxpayerscouldgreatlyreducetheirtaxbygiftingtheirwealthbeforedeathbecause

gifttaxesratesweresignificantlylessthanestatetaxes.TheTaxReformactof1976also

introducedthegeneration‐skippingtransfertax.Thispreventedtaxpayersfromsavingon

transfertaxbyskippinggenerationswhentransferringassets.Thiseffectivelycreatedthethree‐

partunifiedtransfertaxsystemwehavetoday1.

VariationsinEstateTaxRatesandExemptionAmounts

TheEstateTaxRatesandexemptionamountchangealmosteveryyear.In1916when

theEstatetaxwasfirstintroducedtheexemptionamountwas$50,000andthetopratewas1

percent.Since1916thetaxratefluctuatedalotandithasbeenashighas77percent.Evenin

thepasttenyearstheratesandexemptionamountshavevariedgreatly.Table1onthenext

pageshowshowanestateof$10milliondollarswouldhavebeentaxedeachyearoverthe

periodof2001‐2011:

1 (Jacobson, Raub, and Johnson 120-124)

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Year Estate Exemption TaxRate EstateTax

2001 10,000,000 675,000 55% 5,128,750

2002 10,000,000 1,000,000 50% 4,500,000

2003 10,000,000 1,000,000 49% 4,410,000

2004 10,000,000 1,500,000 48% 4,080,000

2005 10,000,000 1,500,000 47% 3,995,000

2006 10,000,000 2,000,000 46% 3,680,000

2007 10,000,000 2,000,000 45% 3,600,000

2008 10,000,000 2,000,000 45% 3,600,000

2009 10,000,000 3,500,000 45% 2,925,000

2010 10,000,000 Repealed Repealed 0

2011 10,000,000 5,000,000 35% 1,750,000

Thetableshowsthatbasedonthetaxrateandtheexemptionamounttheamountof

estatetaxduecanvarygreatlyfromyeartoyear2.Thiscanmakeplanningforestatetaxesvery

difficult,especiallyforthosewhosepropertyvaluecomesfromlandownership.

EffectofEstateTaxesonFamilyFarms

Althoughthepresumptionisthatestatetaxesareonlyforthewealthy,estatetaxeshavehad

significanteffectonsmallbusinessandfamilyfarms,especiallyforthosewhodon’teffectively

planforestatetaxes.Familyfarmscanhavealotofappreciatedvalue;howeversincetheyare

2 ("savewealth.com")

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Comment: I know this is probably not the

“accountant” way to say this, but I think a good

transition to family farms is necessary here.

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landandpropertytheyarealsonotveryliquid.Whenafarmerdiesandleaveshisfarmtohis

childrenthefarmisincludedinthefarmer’sgrossestateatitsfairmarketvalue.Alotofthe

timethesefarmsareworthmillions.Thiscanleavethechildrenwithalargeestatetaxbill.For

example,afarmworth$10milliondollarsin2009wouldgenerateanestatetaxbillofcloseto

$3milliondollars.Sincealotoffarmsdon’tproducealotofincome,thechildrenwouldbe

forcedtosellthefarmjusttopaythetaxonit.Furthermore,oftenthesefarmsaresoldfor

muchlessthantheirvaluebecauseoftheurgencytosell.Inmanycasesthefarmhasbeenin

thefamilyforyearsandisthefamilies’solesourceofincome.It’salsoverycommonforfamilies

toresideonornearthefarm.Thishasbeenaverydifficultissueformanyfamilieswhoinherit

familyfarms3.

FamilyLimitedPartnerships

Fortunately,therearesomewaystoplanforestatetaxes.Theseplanningtechniquescan

greatlyreduceandsometimeseliminateestatetaxesaltogether.Onewayistomovethefarm

intoaFamilyLimitedPartnership(FLP).MovingthefarmintoaFLPallowsthefarmertogift

sharesofthepartnership,uptothevalueoftheannualexclusionamount,tomembersofthe

familywhilestillmaintainingcontrolofthefarm.Thisalsolimitsthemarketabilityofthefarm,

effectivelydecreasingthevalueofthefarmandreducingexposuretoestatetaxes.Overtime,

thefarmer’sestateisreducedassharesinthepartnershiparetransferredtax‐free.Forthis

reason,FLPgreatlybenefitsthosewhoplanwellinadvance4,andanothersolutionisonitsway.

3 (Souza )

4 (Dalton and Langdon 241-244)

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Section6166

Congresshastriedtoeasetheburdenofestatetaxesonsmallbusinessesandfamilyfarmsby

enactingSection6166oftheInternalRevenueCode.Section6166allowsanelectiontoextend

thepaymentofestatetaxbypayingininstallmentsovera14‐yearperiod.Thismayenable

familiestoavoidhavingtosellthefamilyfarm,howeverthefamilywillstillhavetopayinterest

onthetax,andthepaymentsmaystillbeahugeburdenforthefamilytopayfromtheirlimited

farmincome5.

FamilyFarmPreservationandConservationEstateTaxAct

In2009,RepresentativeC.ThompsonsponsoredabillcalledtheFamilyFarmPreservationand

ConservationEstateTaxAct.Thebillwouldexcludefamilyfarmsforgrossestatesifthefarm

waspassedtodescendentsandwasusedbythedescendentsforfarmingpurposes.Ifthe

familywaseversoldthefarmorwasnolongeruseditforfarming,arecapturetaxwouldbe

imposed.Unfortunately,thebillhasnotgottenveryfarsince2009andticurrentlysitswithThe

HouseWaysandMeansCommittee6.

PossibleEliminationofEstateTaxes

Estatetaxeshavebeenanissuediscussedalotinthiselectionyear.Manyrepublicanswantto

eliminatetheestatetaxesalltogether—mostnotablylikelyrepublicanpresidentialnominee

MittRomneyhasexpressedhisdesiretoendthetax.Thosewhosupporttheeliminationof

estatetaxesclaimthatestatetaxeslimitsmallbusinessgrowthandencourageconsumption

5 (Dalton and Langdon 467-468)

6 ("Open Congress")

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ratherthansaving.Also,estatetaxesarenotasignificantsourceofrevenue,theymakeupless

thantwopercentoffederalrevenuesandcostapproximatelythesameamounttocollectand

enforcecompliance7.Whilethereisalotoftalkabouteliminatingestatetaxes,therearemany

whosupportestatetaxesandanyattempttoeliminatethemwhocertainlymeetlotsof

opposition.Thefutureofestatetaxesisveryuncertain.

Conclusion

Estatetaxisconsistentlychanging;thiscanmakeplanningforitverydifficult.Evenso,forthose

withlargeestates,planningisvitalinordertoavoidleavingalargetaxburdenwithheirs.Estate

taxescanbeahugeissueforsmallbusinessandfamilyfarms,andplanningwellinadvancemay

betheonlywaytokeeptheirbusinessorfarminthefamily.Whileestatetaxationmaysee

majorchangesinthefutureandmayevenbeeliminated,thesechangesareuncertainanditis

stillveryimportanttoprepareforestatetaxes.

7 ("Reasons to Repeal Estate Tax")

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Comment: I don’t think you mentioned small

businesses in the paper before, if you did, great. If

not, I would either take this out or be sure to mention

it somewhere before the conclusion. Also, is it small

business farms and family farms? or is it small

businesses and small family farms? If it is just small

business, make it “small businesses” and “family

farms.”

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Works Cited

Dalton, Michael A., and Thomas P. Langdon. Estate Planning for Financial Planners.

Sixth Edition. St. Rose, LA: Money Education, 2011. 241-244, 467-468.

Jacobson, Darien B., Brian G. Raub, and Barry W. Johnson. "The Estate Tax: Ninety

Years and Counting." 120-124. Web. 19 Apr. 2012. <http://www.irs.gov/pub/irs-

soi/ninetyestate.pdf>.

Open Congress. Participatory Politics Foundation, n.d. Web. 19 Apr 2012.

<http://www.opencongress.org/bill/111-h3524/show>.

Reasons to Repeal Estate Tax. Policy and Taxation Group, n.d. Web. 19 Apr 2012.

<http://www.policyandtaxationgroup.com/html/repeal.html>.

. "Estate and Gift Taxes." savewealth.com. N.p., n.d. Web. 19 Apr 2012.

<http://www.savewealth.com/planning/estate/taxes/>.

Souza, Christine. "Estate Tax Proposal would help Farm Families." Ag Alert 2 Sep 2009,

n. pag. Web. 19 Apr. 2012. <www.agalert.com/story/?id=1375>.