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Death tax is killing the family farm

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POSTED: January 5, 2013 12:00 p.m.

What does a farmer do in the winter?

Usually, he is busy paying bills from last year and getting ready for the next year by deciding what crops and cultivars to plant, soil testing, applying lime where needed, fixing and maintaining his tractors and other farm equipment, deciding what new equipment is needed, where to buy fertilizer and shaking his head at how much costs have gone up. My point being that farmers are always busy. But this year, there is renewed urgency to find a solution to a major family issue: inheritance.

Farming is a “capital intensive, cash poor” enterprise. Farmers may have a lot of wealth on the books, but that wealth is tied up in land, equipment, barns and irrigation equipment. When the farm owner dies, all that wealth is part of his estate and is taxed by the federal government. This tax commonly is called the “death tax.” In 2009, the formula for the death tax was an exemption of the first $3.5 million for and individual ($7 million for husband and wife) and a tax rate of 45 percent on everything over that amount. It does not take a very large farming operation to have $3.5 million tied up in land, buildings and equipment when combines can cost in the neighborhood of $400,000.

Here in coastal Georgia, with relatively inexpensive land, any farmer who owns 1,000 or more acres of cropland is squarely in the crosshairs of this tax. Congress could not agree on a new formula, so in 2010 there was no formula. From an inheritance-tax point of view, 2010 was a good year to die because there was no inheritance tax. We have reached a sad state in which the best way a farmer can ensure his farm gets passed along to his children and not sold off to pay tax debt is to die.

The new formula for 2011 and 2012 has been an individual exemption of $5 million and a tax rate of 35 percent on everything over that amount. This new rate did not really encourage growth of farms so much as it penalized farmers less than the old formula. The current farm bill expired in late 2012, and once again, a new farm bill has not been authorized. Without a decision from Washington, the new formula for the death tax in 2013 becomes exemption of only the first $1 million and a 55 percent tax on everything more than that. If this formula is allowed to stand, it will be a real threat to the ability of more than half a million U.S. farms to survive the death of the owner and be passed along to their children.

So now, farmers are spending time and money with attorneys and estate and tax planners to find ways to legally avoid or pay the taxes without having to sell the farm. If allowed to take effect, this tax increase will affect one in 10 American families — not just farmers, but 10 percent of all American families. It is not just a farm-inheritance tax; it is an everybody-inheritance tax. This will hit small-business owners, too, but most small businesses are not as cash poor as farmers. The children of farmers often have no choice but to sell the farm in order to pay the inheritance tax unless they prepare years in advance on how to pass the farm from one generation to the next.

There are a number of mechanisms and techniques to do this, and each farm situation has to be addressed individually. If I tell you much more about farm succession, I will be telling you much more than I know. If they have not already done so, farmers need to consult with estate planners, tax planners and attorneys to protect their farms for their children. Ninety six percent of American farms are family owned and operated. If the planned 2013 rate is allowed to become law, it will hurt families — not some big faceless corporation, but the families in this community.

Launching an assault on the people who grow the food you eat is not smart. Even a dog knows better than to bite the hand that feeds it. No nation has survived the destruction of its farming industry. We will be no exception.

Don Gardner of Keller is the UGA extension agent for Glynn County.

 

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