Inheritance taxes and the family farm

Thursday, December 3, 2009
Inheritance taxes and the family farm

Sean Paul Kelly recently posted a piece in opposition to a bill locking in inheritance taxes at 45% with an exemption for the first $3.5 million. The post seemed to draw nothing but praise.

I don’t agree, but I needed to think about the matter a bit before posting.

Consider the implications on the farm where I now live and work, should the new inheritance tax scheme come into effect (55% tax above $1 million exemption). My dad bought this place for somewhere around $700,000 about ten years ago. If he were to leave this land to me, the current value is somewhere around $3 million.

It shouldn’t be worth this much and it isn’t based on its ability to produce income. But it is due to its recreational value and perhaps as investment property. Despite that fact, the government will tax me according to present market value.

The land maintains 150 cows at best, year in and year out. The average calf fetches $500. So we have a gross income of $75,000 from cattle sales if we do not replace old cows. Old cows have to be replaced. So we keep some heifers each year and sell a few old cows that fetch less than their calves would be worth. Let’s say $350. Despite our best efforts, a few cows die each year and not all cows have a calf.

Fields must be sprayed for weeds and fertilized. We harvest, store and feed hay to cows in the winter, incurring labor and machinery costs. In a dry year, we also have to irrigate land with additional energy (and equipment) costs. If we owe money to the bank, interest must be paid.

We must maintain fences and structures.

We raise a few cash crops–feed grains–but profits on these have been minimal at best.

I also sell some excess hay at a meager profit, after investing a serious amount of hard labor under sometimes oppressive conditions.

When all is said and done, this land I am told is worth $3 million pays me a salary of $30,000 a year. At best. And that is it.

So, if I get an exemption of $1 million and owe 55% on the balance, I will owe $1.1 million dollars in inheritance taxes should my dad decide to leave this place to me. Takes a while at $30,000 a year gross to save a million bucks.

My dad has never worked a day on this land. I have. While he did bankroll me, I have been responsible for and cared for this land from day one. I have sweat equity invested here.

Most small family farmers are in a similar position. They own property their sons and daughters cannot afford to keep if this new tax law comes into effect.

So what will happen in most cases like mine?

Sons and daughters will be forced to sell the family farm to pay taxes and mortgage payments to a bank in many cases.

The money the government collects will not be used to fund social programs. It will be used to fight wars. To bail out Wall Street bankers. Who will use the money to buy my farm so I can pay my tax bill. And of course, to write themselves yearly bonus checks.

And then the land is placed into corporate owned megafarms, immune to things like inheritance taxes.

You aren’t giving heirs to wealth anything. Their parents are. You’re saying the government has a right to what they earned.

Believe it or not, some of us actually earn our inheritance.

Be careful what you wish for. Some day you might get it.

A million bucks ain’t what it used to be.

14 comments to Inheritance taxes and the family farm

  • Don

    PS. I’d add that the sons and daughters of most farmers are worse off than I am. Most of them are handed a debt at the bank in addition to a tax bill and count themselves lucky to get away from the farm debt free.

    For what it’s worth, my dad also earned the money he used to buy this farm and he already paid taxes on that income at least once.

    I did inhale.

  • Tina

    could be a way to exempt family farms and small business.

  • Sean Paul Kelley

    before the Bush tax cuts. Historically, family farms have not been taxed like large capital estates. I will email a CPA friend and ask him to explain it.

    “All men’s gains are the fruit of venturing.”

    -Herodotus

  • Sean Paul Kelley

    IRS.gov:

    What about the value of my family business/farm?
    Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms or businesses operated as a family farm or business, reductions to these amounts may be available.

    In the case of a qualifying Family Farm, IRC §2032A allows a reduction from value of up to $820,000.

    If the decedent owned an interest in a qualifying family owned business, a deduction from the gross estate in the amount of up to $1,100,000 may be available under IRC §2057.

    “All men’s gains are the fruit of venturing.”

    -Herodotus

  • Lex

    with the business owner that i work for (very conservative but strangely so).

    He thinks that the inheritance tax should be in the 90% range, but should exempt operational businesses up to about $5 million. His reasoning is that if he gives the business to his kids, one of them will have to work it just like he works it. And while it may be worth X number of dollars it generates less than X number of dollars every year. He’s fine with the 90% tax rate if his kids decided to sell the business rather than run it.

    His situation is probably similar to Don’s, because he told me during the campaign that he wasn’t worried about Obama raising the income tax (he also believes in progressive income tax) since he didn’t net more than $250,000/year.

    It shouldn’t be used to punish people who work hard, have some success and decide to build wealth across generations. It should be used to tax people who have so much wealth that they don’t have to work at all, nor their children, nor their grandchildren.

    But yeah, a real problem is that the money gained from the taxation will be squandered by the political class.

  • zot23

    < $5M = nada
    $5-10M = 55%
    $10-25M = 65%
    $25-100M = 80%
    >$100M = 90%

    I definitely think Don has a point. We live on a small 7 acre farm in Colorado, really sort of a small country estate. Our house and land alone is worth more than $1 Million (well, maybe not right now, but usually) and we have 3 kids. We’re well off but super-rich? Not in the slightest.

    If Dems were smart (and gave a crap), they could set the minimum at $5M for taxation, have it start at 55% and then scale upwards. The ones you want to tax the most are the super wealthy like the Gates, Hiltons, etc. Businesses should definitely be exempt to at least $5 million (if not $10), I know a lot of family businesses that would be liquidated under the current laws. It does need fixing, but not the way it is now presented.

  • zot23

    it would be very smart for Obama or dems to add a few more tiers to the income tax brackets. Say make a $250K-$1M tier of 50%, a $1-5M tier of 65%, and a final >$5M tier at 80%. This way, no one except the very wealthy would be affected, let them fight that battle on their own.

  • AMC

    First, there are ways around the inheritance tax, if people bother to plan. For example, the family farm can be put into a limited partnership, with gifts of equity in the partnership being done every year at the level the gift tax laws allow – that was $10,000 each year, but has increased to at least $11,000. Depending how many children are getting the farm, and how many owners of the farm there are, this can work more quickly than you might expect. For example, a husband and wife can each give $11,000 in equity ($22,000 each year) in the limited partnership to each child who will inherit an interest in the farm.

    Like many other things in life, it just takes some advance planning.

    Second, bad laws get made because of annecdotal situations like this – instead of fixing the problem with a specific targeted provision, like a higher exemption for a family farm or business, the response is to advocate elimination of the estate/inheritance tax for everyone. That’s killing a gnat with a shotgun – much to the pleasure of those would benefit from avoiding an inheritance tax, but who have no equitable argument for not having it apply to them.

  • Don

    is a hidden tax that affects all of us.

    Consider what that law would mean should we experience a hyperinflationary event like Mexico or Argentina went through.

    The big money in America is corporate and those guys have ways of avoiding taxes.

    I’m not well versed in the matter, but I know that’s the way it is.

    I can drive down the road and point out examples, concerning farms in our area. Nolan Ryan owns the Aylesworth ranch, and about ten or more similar places. Graham Land and Cattle has absorbed others.

    What we have is a massive government sponsored corporate takeover going on and this law plays right into the hands of those you think it is designed to punish.

    I did inhale.

  • Mark

    this issue came up and the consensus was that the concept of a family farm lost for estate taxes was debated and determined to be a myth. The other question that has always bothered me about this debate is why would farmers, as opposed to other businesspeople, be entitled to some special break? I have nothing against farmers, but a farm is a business like any other. People tend to wax romantic about farmers going out each morning to tend their crops and livestock in ways that they never do about, for example, lawyers going out each morning to tend their cases. Both are likely dedicated and diligent and find their work rewarding and yet the farmer is seen as more worthy.


    “I despise ideologues masquerading as objective journalists.” – Bill O’Reilly, March 30, 2007

  • Don

    small family owned businesses don’t also enjoy.

    That just happens to be the area I know something about.

    If your facts say inheritance taxes haven’t caused family farms to be lost, your facts are flawed. Like I said, I can drive down the road and show you proof in our locality.

    While there are poor rural types that have stayed on the land by working a job in town, there are almost no working farms that have stayed in a family from one generation to the next in our area.

    Inheritance taxes are just one of many reasons that’s the case.

    If the New York Times can’t find the names, well then let me be of assisstance.

    Start with John Bachman. The Aylesworth estate. The list is long.

    Ask Charlie Robison what happened to the ranch land his family owned.

    Maybe the farms don’t show as being lost because they are sold due to bank debt (the bank gets them before the government has a chance).

    A privately funded nature conservancy recently bought land from ranchers in the Davis Mountain area of Texas and then granted the ranchers’ children perpetual leases on the land. So they didn’t lose their land. They would have had to sell had not this group come along because the land was worth far more to hunters and speculators than cattle ranchers can afford to pay.

    In Texas, this is the rule, not the exception to the rule.

    I did inhale.

  • Don

    http://www.mysanantonio.com/news/MYSA061305_1A_tobacco_3d09553_html13843.html

    Then go right ahead. But I assure you, you’ll face a gauntlet of accountants and tax attorneys.

    While the people he displaced work in town.

    I did inhale.

  • Don

    that if our government had a cheap law service provision that paralleled our cheap food policy your average lawyer would be providing services for $10/hour. And he’d be considered worthy.

    Conversely, if farmers were paid like lawyers, the average grocery bill would be $1,000/week and farmers would be reviled.

    I did inhale.

  • darms

    As this goes against much of what I have previously read on estate taxes and seems to mirror what I’ve heard from the right, Don, I’d really like to hear more on this topic. If it is really true that estate taxes have in fact severely impacted the “family farm” then I may need to rethink my position on estate taxes. (BTW my MIL owns some acreage in Seguin and no, her estate won’t come anywhere near to being impacted by inheritance taxes)

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