Death tax games: Playing with farmers' lives

by Paul W. Jackson

Call it a tribute to farmers' resilience and business sense. Or maybe it's just that farmers tend to keep their mouths shut about their personal business. Either way, annoying background noise muffles the voices of farmers who oppose the death tax or have been harmed by it.

Lawmakers who ride the 'soak the rich' bandwagon without understanding agriculture's unique position and ultimate value to society seem to come back with a familiar noisy refrain time and again: "Show me someone who's lost their farm to the estate tax," they challenge.

Either to ag's credit or detriment, few farmers have lost entire farms to the estate tax. The ones who did generally don't like to talk about it, according to Brigette Leach, a Climax-area family farmer who is personally acquainted with the grief and loss associated with the federal estate tax, also known as the death tax.

"When we think about what a half-million dollars that we paid the federal government would have done for our operation, we know it would have made a difference for us," she said. "We held on, but it took its toll. That money is gone. It was not invested in anything but the government, and that's a shame. Besides that, is it fair to say the death tax is damaging only if you lose the whole farm?"

Another discordant song from policymakers who endorse the death tax - and this is more of a deception than a valid point - is to call it an inheritance tax.

The implication of that word, said Ryan Findlay, national lobbyist with Michigan Farm Bureau, is that heirs are taxed based on new assets they've acquired from the work of their deceased family members. But it's not true.

"The fact is that this is not an inheritance tax," he said. "It is plainly and simply a tax on a dead person."

Regardless of people's feelings about that, the death tax has been part of the American political landscape since 1916, and politicians generally don't like to rescind a tax once it's in place. But the situation heading into 2011 is a real game-changer, like requiring football players to play in leather helmets.

A brief recent history

Prior to 2009, a deceased person's estate was exempt from taxes varying from the first $1 million of value to the first $2 million. That value was - and still is - based on every asset the person had.

By 2009, the first $3.5 million in asset value was exempt, and anything above that value was taxed at a maximum rate of 45 percent. But in 2010, due to legislation that did nothing more than postpone the inevitable, the estate tax became nothing. That would have been a very good thing, except that the intent of Congress was never to eliminate the death tax.

"There was a sunset clause built into the estate tax as a mechanism to make Congress take action before the death tax reverted to nothing or the old $1 million asset exemption and a maximum tax rate of 55 percent," Findlay said. "No one thought Congress would have just let this happen, but it did. Similarly, a lot of tax incentives that were beneficial to farmers are going to expire at the end of this year."

That's why it's so important, he said, to be sure that the former tax exemption rate of $1 million does not automatically return.

"It is so easy for a farming operation to have assets of $1 million, even if you don't count the land value," he said. "Most farmers are worth more than a million dollars, but it's all tied up in land, animals and equipment. It may sound like he's rich, but that money's not in the bank. It's in assets that in most cases need to be sold to pay the tax. It's time that the tax law catches up with reality."

Reality in Congress, however, is different than on the farm.

"We would prefer that there be no death tax at all," Findlay said. "But if we have to have one - and Congress apparently believes the country needs it - it must provide a tax exemption on the first $5 million with a maximum tax rate on anything above that at 35 percent."

Even at that, the death tax would create a financial burden on farmers, but it's preferable to being soaked at a 55 percent rate for every asset over $1 million. Still, Congress continues to do nothing, according to Pat Wolff, tax specialist with the American Farm Bureau Federation.

"The Senate is just tied up in knots over partisan bickering, and that's blocked all legislation, including legislation that would provide important estate tax relief," she said.

In contrast, farmers tend to take action when the tax man arrives, or even before that.

Take Matt Carpenter, whose family farms just outside Adrian in Lenawee County. His is a complicated story of zoning and death taxes which ended up costing him a six-figure death tax bill. He didn't lose the farm, but the tax kept him from investing in his business for five years.

"I wanted to put in a center-pivot irrigation rig, and I wanted to put in an ag tourism operation for the fall tourists," he said. "We did both eventually, but we had to wait five years. I was absolutely restricted financially because of the estate tax and the zoning issues. We were able to survive because we had good estate planning and a good trust, but the tax laws have changed so much that when we went to settle the trust, some things were all wrong."

After family members exhausted a good portion of their retirement savings to pay the tax, Carpenter was successful in changing his zoning back to ag from a commercial zone, but the damage had been done. His tax was based on the commercial rate, or the "highest and best use" designation for the property. And the fight to get his 190 acres back in the ag zone was not easy.

"It was a split vote, and I think I was successful at least in part because of my tax story," Carpenter said. "On the other hand, I'm not sure all of them believed the story of my tax bill."

There's the challenge for agriculture. If locals won't believe or understand what kind of burden is put on ag businesses due to the death tax, what chance is there in a Congress that's hostile to ag at worst and apathetic at best?

"It depends a lot on what happens in the fall election," Findlay said. "We need lawmakers who understand family business and the negative impacts of death taxes on those businesses. Besides, how can a farmer or any businessman plan for the estate tax if it goes from no tax and unlimited exemptions (2010) to a $1 million exemption and a 55 percent tax rate (2011 and before 2009) to a $3.5 million exemption and a 35 percent tax rate (proposed in Congress), all in the course of three years?"

No matter what happens in election-year politics, though, the time has come to make the issue urgent, Wolff said.

"The average age of a farmer is now over 55 years," she said. "That means we're getting ready for a transition. Either farms are going to turn over to the next generation or farms are going to go out of business and we're going to get our food from overseas. So it's very important that we get rid of this tax so that the next generation of farmers can stay in business and produce food, fiber and the energy our country needs."

The bottom line, then, is to prove to Congress that the estate tax damages farms. And they'll never accept it until people step forward and tell their stories.

"If you're in a death tax burden situation, please call me at (800) 292-2680. Extension 2025," Findlay said. "Your story just might be the one to convince that one crucial member of Congress to kill the death tax."