Monday, Aug. 23, 2010

Bill and Carol Chandler have long dreamed of passing down the family's Selma farm to their two sons.

But with a rollback of federal estate taxes set to expire in January, they might have to rethink those plans.

Unless Congress intervenes, their kids would face a tax of up to 55% of the value of the estate, up from 0% this year.

"It is scary," said Bill Chandler, 69. "You plan for so long, and then something comes along that could change it all."

The estate tax has long been a worry for business owners. But it's especially daunting for farmers, who typically are asset-rich and cash-poor. The tax is based on assets.

Tax cuts enacted in 2001 gradually reduced the tax and raised the minimum value of estates that could be taxed. This year, the tax rate dropped to zero.

But on Jan. 1 the tax rate is due to bounce back to where it stood 10 years ago. And the minimum value of estates to be taxed, which had reached $3.5 million last year, will drop to $1 million.

Given enough time to prepare, families can ease the pain by buying life insurance policies or slowly transferring land to children through gifts. And after a death, heirs to a farm can spread the tax payments over 14 years.

But "at the end of the day, you still have to pay that tax," said Curtis Wong, president of Janzen, Tamberi, & Wong, a Fresno accounting firm. "And with farmers who don't have a lot of liquidity, they either have to take out a loan or sell some land."

Tax on the wealthy

Supporters of the estate tax argue that it places the heaviest tax burden on those who can most afford to pay: the wealthy.

The Congressional Budget Office projects that, under current law, federal revenues from estate and gift taxes will be $420 billion, or 1.2% of total revenues, over the 2010-19 period.

But the tax is widely unpopular, and several measures have been introduced in Congress to extend estate-tax relief, either by reducing the rate or deferring the tax.

Farmers are pushing a bill by Sen. Dianne Feinstein that would defer the tax for farmers as long as the land remains in production. With alternative proposals on the table, however, it's unclear whether any of them will be passed to prevent the tax from resuming on Jan. 1.

The Chandlers -- who farm 480 acres of nuts, tree fruit, grapes and citrus -- are preparing for the worst. While the couple has been making gifts of land to their sons, the potential estate-tax bill still is sizable.

The family has identified parcels of land that could be sold to pay the tax, Chandler said. "But that's something we are really trying not to do."

Farm families aren't alone in their concerns about selling land to pay estate taxes. Advocates for farmland preservation say it could accelerate urban sprawl on productive farmland and make it more difficult for the next generation of farmers to survive.

"If that lands sells, who do you think is going to buy it?" said Paul Wenger, president of the California Farm Bureau Federation. "It will be someone who will buy it for speculative purposes."

Especially hard hit

While the estate tax applies to everyone, farmers say it hits their industry particularly hard.

Because the business is anchored in the land, farms usually have higher asset values than do other businesses with comparable cash flow.

A farmer and a retail store owner may make the same amount of money in a given year, but their assets could be very different, said Toni Porter, a partner with the Fresno accounting firm Baker, Peterson & Franklin.

A store's assets -- as in inventory -- turn over very quickly and generally do not accumulate, while a majority of the farmer's assets are in the land.

"A business may have more earning capacity but because they don't have as many assets, their estate tax may be lower," Porter said. "And the estate tax is based on the amount of assets you own at the time of death."

Development pressure creates an added problem for California farmers by raising the value of their land --making their tax bills larger.

Sanger farmer Liz Hudson's family confronted the tax issue nearly three decades ago when her parents and uncle were forced to sell more than 200 of about 300 vineyard acres in southeast Fresno to pay off an estate tax bill.

The farmland was valued as a potential subdivision, increasing the tax bite.

"It just seemed so unfair and painful," Hudson said. "This is money that could have been reinvested back in the community, improving the local community and adding more jobs."

What happens now?

The uncertainty over what Congress may do makes planning difficult.

"I have one client who says his kids have planned for his death in 2010 so they won't have to pay estate taxes," Wong said. "And while I know he is being facetious, it is because Congress has not addressed this issue that people are taking a wait-and-see attitude."

The California Farm Bureau Federation is supporting the Feinstein bill, which would defer the estate taxes for farmers whose farm net income falls below $750,000 annually. The deferral would apply only if the farm is passed down to a family member who has been involved in the operation for at least five years.

Feinstein's bill has been referred to the Committee on Finance. A similar bill was introduced in the House by Rep. Mike Thompson, D-Napa.

Critics of the estate tax -- labeled a "death tax" by some opponents -- say Feinstein's bill doesn't go far enough.

"It is a step in the right direction," said Dick Patten, president of the American Family Business Institute. "But it is not the final solution. The death tax is the problem, and it has to end."

Wenger, of the California Farm Bureau Federation, hopes Congress will act on estate tax reform this year, saying he, too, worries about his own children's future. An almond and walnut grower in Modesto, Wenger has three sons, two of whom are involved in the family's 400-acre farm.

"What I don't want to happen is for my children to have to sell half the land just to pay the taxes," Wenger said. "Because if that happens, there won't be enough of a farm for them to make a living."

http://www.fresnobee.com/2010/08/23/2051374/farmers-fear-return-of-estate.html