By John Schlageck, Kansas Farm Bureau
The fondest wish of most farmers is to pass their land on to their children. They work a lifetime to leave a legacy for a daughter or son who will one day take over the family farm.
Preservation of farming and ranching operations for future generations is being threatened. Estate taxes are especially harmful to agricultural producers because their businesses are capital-intensive with a high concentration of assets tied up in land, buildings and equipment.
Estate taxes tend to be more burdensome for farms than many small businesses because 80 percent of farm and ranch assets are land based. When estate taxes exceed cash and other liquid assets on hand, surviving family members may be forced to sell land, buildings or equipment needed to keep the business operating.
This has a multiplier effect because rural communities and the businesses they support also suffer when farms and ranches downsize or disappear. Also, farmland close to urban centers is often lost forever to development when estate taxes force farm families to sell off land to pay taxes.
The estate tax expired for one year and one year only on Jan. 1. This coming Jan. 1, 2011, unless Congress acts and does so soon, the estate tax will return and carry an exceedingly low $1 million exemption — anything above $1 million will be taxed at 55 percent. This will harm most family farming and ranching operations.
The talk on Capitol Hill is the Senate will take action on estate tax reform after the Memorial Day recess. Before Christmas, the House passed a permanent extension of the estate tax at 2009 rates. This carries a $3.5 million exemption for individuals and $7 million for couples, while taxing the rest of the value of the estate at 45 percent.
The "off again on again nature" of estate tax law makes it difficult, if not impossible, for farmers and ranchers to engage in planning for the transfer of a family business from one generation to the next. While estate tax planning may be able to protect some family farms and ranches from the devastation of estate taxes, planning tools are costly and take money needed to operate and expand businesses. Even with planning, changing asset values and family situations make it impossible to guarantee that a well thought out estate plan will protect a family business from estate taxes.
Farmers and ranchers who belong to Farm Bureau back permanent repeal of federal estate taxes. Until permanent repeal is achieved, Farm Bureau calls for an exemption of $10 million per person, indexed for inflation. The $10 million exemption may sound high, but it really isn't when you factor in land costs and other variables, particularly for farms in areas where land values are high.
The estate tax amounts to double taxation, because the income is taxed first when it is earned and again when it is transferred to heirs. Eliminating the estate tax will encourage farmers and ranchers to keep the businesses in the family.
As a result farm families can continue the mission of providing food, fuel and fiber for America and the world. It would be a travesty if the next generation was forced to abandon the farm, just to pay the taxes.
John Schlageck is a leading commentator on agriculture and rural Kansas. Born and raised on a diversified farm in northwestern Kansas, his writing reflects a lifetime of experience, knowledge and passion.