As an avid follower of politics, this election cycle seems a little surreal. While the 2016 presidential race has certainly been historical for many reasons, news stories have focused on former beauty queens, sex tapes, and lost emails. Although the circus sideshow is more entertaining than real issues, Americans have plenty to be concerned about. That is especially true in agriculture, with regulations, the economy, trade, and taxes all on the table.
Farmers are also concerned about the estate tax and its potential to financially bankrupt the family farm upon their death.
Dubbed the “death tax,” the estate tax is just about as complex as the rest of the federal tax code. Working in tandem with the gift tax, it is meant to give the government its “fair share” from any transfer of wealth from one generation to the next. In a nutshell, the government looks at the entire estate of the deceased, including any gifts made during his lifetime, and taxes a portion of the estate over an exempted amount. Currently, estates valued under $5.45 million are completely protected from the estate tax. For larger estates, any amount over the $5.45 million is taxed at 40 percent.
How do we determine the size of the deceased’s estate? Normally, property is valued at fair market value, which is considered its highest and best use. However, one special provision in the federal estate tax code allows land used for agriculture to be valued at its current value as used. In other words, as long as Junior plans to continue using the land as a farm, it will be valued at its current farm value, instead of its potential as a shopping plaza and apartment building. The provision does not exempt family farms from the estate tax, but may allow a deceased’s property to be valued at a lower amount.
Family farmers are also faced with uncertainty when it comes to the estate tax. Although it has been around for decades, the exempted amount has changed considerably, as has the tax rate. In 2012, the legislation then in effect was close to lapsing and would have resulted in an estate being taxed for anything over $1 million. The current values were set by the American Relief Act in 2013.
Likewise, interpretations of regulations by the IRS can change, leading to additional tax liability for family farms. Most recently, the IRS has proposed changes to the estate tax regulations regarding the valuation of business assets. The American Farm Bureau Federation has cautioned that this change may result in family farms seeing an increase in estate tax liability, and has urged members to contact their congressional leaders to support proposed legislation prohibiting the change.
Despite favorable provisions, the death of the family’s patriarch or matriarch may still result in a family farm being divided up and sold off to pay the taxes. Farmers are usually considered cash poor, because their money is tied up in assets, especially land. When the value of a deceased’s estate goes over the exempted amount, the hefty tax has to be paid whether the estate actually has the cash to do so. Many times, that means farmland, equipment, or buildings have to be sold to pay Uncle Sam. For children that wanted to keep farming, this scenario could dash their dreams.
So, where do the presidential candidates stand on the estate tax?
Donald Trump has said he would completely abolish the estate tax. Speaking to farmers in Iowa in December, he said: “We are going to get rid of the estate taxes that are making the farmers sell their farms. I understand it. You have farmers out there who are wealthy but they are a little bit cash short.” In August, he made the same pledge, this time to save family businesses in Detroit. Although Trump has received criticism that he holds this position only to protect his own family from paying extensive estate taxes upon his death, no doubt a total repeal would also benefit family farmers.
Not surprisingly, Hillary Clinton would take the opposite approach. She would return the estate tax to its 2009 levels, meaning the exempted estate would only be $3.5 million. Clinton would also raise the tax rate to 45 percent, with higher taxation levels for larger estates. Clinton’s website also claims she would abolish provisions in the estate tax code that allow people to “make their estates appear to be worth less than they really are.” Obviously, this proposal would mean more family farms will end up paying estate taxes, and at a higher taxation rate. While it isn’t clear which provisions she would abolish, it is possible she is referring to the provision which allows farmers to value farmland as its current use.
In an election that has been filled with the scandalous and salacious, there is hardly room for estate tax discussion on the campaign trail. For family farmers though, the very real possibility that it could result in their farm being divided up and sold upon their death makes this issue extremely important and relevant. There are many issues that voters should take into consideration when making their choice on Election Day, but the future of the estate tax should definitely be one of them.
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