NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
July 13, 2000
Congress is currently debating whether to repeal the estate tax. Proponents of the repeal argue that the estate tax makes it difficult to pass a family business to the next generation, and they use family farms as a key reason for eliminating the so-called death tax. But as in many debates, perception does not always match reality, says an agricultural economist at North Dakota State University.
"The reality is that very few people end up owing estate taxes," says Andrew Swenson, farm management specialist with the NDSU Extension Service. "In fact, some tax planners argue that the estate tax is voluntary because with proper planning it can usually be avoided."
Statistics appear to support that assertion. Nationwide, less than 2 percent of estates are taxed. In 1997 there were 224 estate tax filings in North Dakota, but in only 49 cases were estate taxes owed, Swenson says.
"How many family farms are impacted by the current estate tax?" Swenson asks. "To answer this question, one must know some details about the estate tax. The estate tax is a progressive tax starting at 37 percent of net worth, in excess of a $675,000 exclusion. Setting up a unified credit shelter trust can double the exclusion to $1.35 million for a married couple. The individual exclusion and unified credit shelter trust will increase incrementally each year and reach $1 million and $2 million, respectively, in 2006."
There is also a family owned business deduction and a special-use valuation for farms and other real estate provisions designed to alleviate the impact of estate taxes on family owned businesses. Although rules for qualifying can be complicated and somewhat restrictive, it may be possible for a married farm couple to have net worth of up to $4 million without paying estate taxes, Swenson stresses.
Using data from the North Dakota Farm Business Management Education program for sole proprietor farms, Swenson estimates that about 9 percent of North Dakota’s 30,500 farms have a combined net worth greater than the current $675,000 exclusion. (Combined net worth includes farm and nonfarm assets using market valuation.) Less than 2 percent of North Dakota farms have net worth greater than the $1.35 million unified credit shelter trust available to married couples.
Of the 8,600 North Dakota farms that have average annual cash receipts greater than $100,000, Swenson estimates that nearly one-fourth of these operations have net worth greater than $675,000, but only 6 percent have net worth in excess of the $1.35 million unified credit trust available to married couples.
"The perception that the typical family farm is hit by estate taxes exists because farms are increasing in size and people may think operators own all the land they farm," Swenson explains. "Also, people may see the assets of a farm, but not the debt. In North Dakota, a majority of operators own only about one-third of the land they farm, and most also have sizable liabilities."
For example, an operator with 2,100 cropland acres may own about 700 acres, which at $425 per acre would have a value of $297,500. Total farm assets, including machinery and buildings, would likely total about $600,000, Swenson says. Assuming a 40 percent debt, the net worth for this farm would be $360,000, an amount significantly less than either the $675,000 exclusion or the $1.35 million unified credit shelter for married couples.
"In most instances, deciding how to divide an estate among heirs so that a viable farm operation remains is much more of a problem than dealing with the issue of estate taxes," Swenson adds.
Meanwhile, Congress may vote on whether to repeal estate taxes before the upcoming November elections. Those who wish to repeal the estate tax contend that it is unfair because individuals have already paid taxes on earnings throughout their lifetime, Swenson says. Supporters of a repeal also argue that people should have the right to determine to whom their estate should go and that the government should not be on the list of recipients. In addition, they say an important goal for some business owners is to build an operation large enough to employ family members.
In contrast, repeal opponents believe the estate tax guards against the concentration of wealth. Swenson illustrates this concern by using an extreme example. He says, "The farm land and buildings in North Dakota have a value of about $18 billion. According to Forbes Magazine, six Americans have enough wealth to purchase all of these assets. In fact, the combined wealth of the four richest Americans could buy all the farms in the Dakotas, Nebraska, Kansas and Iowa, which make up more than 90 percent of the land area in those states. If transactions like these were to occur, rents would be collected on the property, and the accumulated wealth could be passed on, generation to generation, but what would be the impact on family farms?"
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Source: Andrew Swenson (701) 231-7379
Editor: Dean Hulse (701) 231-6136