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Is the death tax killing American family farms?

April 13, 2015, 4:21 PM UTC
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SPALDING, NE - SEPTEMBER 30: Bob Bernt looks after cattle on his farm on September 30, 2013 in Spalding, Nebraska. (Photo by Scott Olson/Getty Images)
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Tennessee farmer Brandon Whitt told the House Ways and Means Committee this past March that the estate tax–often called the death tax by opponents–is crippling his and other family farm operations across the country.

In public testimony, Whitt said his father-in-law was forced to sell off a large portion of farm land in 1998 to pay the estate tax when he inherited the operation. What’s left, Whitt said, is a seventh-generation farm with little liquid assets and an inability to expand.

Saying he faces the same dilemma as his father-in-law in the years ahead, Whitt urged Congress to “quickly act to end the estate tax so no other farmer or rancher has to sell part of their business to pay this misguided tax.” The committee later voted along party lines with to repeal the estate tax—with Republicans in the majority—but it stands little chance of becoming law with President Obama calling for higher estate taxes.

So is the estate tax killing American farms, as Whitt and long-time critics claim?

“The better question would be is the estate tax hurting the continuation or transition of the American family farm,” said Ramsay Slugg, a wealth strategist at investment management firm U.S. Trust.

Slugg said because the estate tax exemption is $5.43 million per person, or $10.86 million per married couple, less than 1% of the total population is subject to it.

“So the answer to whether it’s hurting farms is, not so much,” said Slugg.

Family farms rule

In fact, the number of American family farms seems to be more than holding its own.

According to the United States Department of Agriculture, 97% of the 2.1 million farms in the U.S. are family-owned.

By definition, the USDA says a family farm is any farm where the majority of the business is owned by the operator and individuals related to the operator, including through blood, marriage, or adoption.

Breaking down the numbers further, the USDA says 88% of all U.S. farms are small farms, while 58% of all direct farm sales to consumers come from small family farms.

But those figures can be confusing, said Steve Ford, professor of economics at Sewanee: The University of the South, as most family farms have morphed over time into legal corporations just like the larger known farming outfits, such as Cargill, Tyson Foods (TSN) and Perdue Farms.

“The vast majority of corporate interests in farming are family-owned,” said Ford who runs his own 1,500 acre farm in Alabama.

“My wife and I are the co-owners of the partnership we formed,” Ford said. “There were a number of reasons for this, but estate tax planning and protection of assets from liability claims are chief among them.”

Why an estate tax?

The estate tax has existed in some form in the U.S. since the 1700s. But the modern estate tax was formalized in 1916. The idea behind it was to keep the rich from avoiding taxes on property or funds passed down to relatives that were “unearned.”

Phased out briefly for tax year 2010 as part of President George W. Bush’s tax plan, the estate tax returned in 2011. With current exemptions, the estate tax is expected to generate about $246 billion from 2016-2025.

But critics claim it’s doing more harm than good.

“The estate tax is simply not a significant source of revenue given the current size of the budget,” said Suzanne Shier, chief tax and wealth planning strategist at Northern Trust Company. “And in the case of a family farm … to the extent that tax payments affect operations there can be loss of employment.”

The reasons family farms are often caught up in the estate tax include expensive farm equipment and high land values, said Valerie Chambers, professor of taxation and accounting at Stetson University. “The land may be valued at its highest and best use, not its value as a working farm to the family,” said Chambers.

“Family farms located near growing urban areas were especially at risk,” Chambers said.

And as farm land values keep increasing, that’s putting more family farms at risk of the estate tax, said Pat Soldano, founder of the anti-estate tax organization, the Policy and Taxation Group.

“Land values have risen much faster than the rate of inflation over the last decade making many farm values well over the current $5.43 million exemption level,” said Soldano.

And because farms have little liquidity and their capital is usually tied up in the land and farm equipment, paying the estate tax makes it difficult to operate a family farm, Soldano said.

Paying the estate tax in order to pass on a farm on to heirs, said Soldano, usually ends up in a sale of the farm or huge family debt.

But as to the actual number of family farms hit by the estate tax, only 20 farms in 2013 paid estate taxes and no farms have been reported sold to pay off an estate tax debt.

“Although the numbers of affected estates has decreased, the impact on those that are affected is material,” argued Shier.

‘Blame lack of planning’

There may more farms facing estate tax issues in the years ahead. That’s because one-third of all farmers in the U.S. are 65 years of age or older while another one-third are between the ages of 55 and 65.

“We’ve got an aging demographic of farms and farm owners,” said John Taylor, national farm and ranch executive at U.S. Trust. Much of this land will have to transition to the next generation of farmers, and this may have to be by sale instead of inheritance, Taylor said.

But while blaming the estate tax for their woes may seem logical for family farmers, they’re really missing the point, said U.S. Trust’s Slugg.

“It’s more accurate to blame lack of financial planning and a lack of interest or ability on the part of future generations to understand what it means to run a business, be it manufacturing or farming,” said Slugg.

And since the estate tax isn’t likely to go away any time soon, farmers are advised to plan now to keep the tax bite to a minimum.

“Family farm owners don’t tend to think of their farm as a business when it comes to passing it on–and that’s a mistake, “said Genevieve Larson, a partner at law firm Withers Bergman who advises agriculture families on estate planning.

“They need to plan for succession. Besides, the Internal Revenue Service appreciates family farms and doesn’t want to see them go up in a fire sale,” Larson added.

Mark Koba is a New Jersey-based freelance writer.

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