Minding Ag's Business

Beware False Hopes on Estate Taxes

The rally cry of "death to estate taxes" won a symbolic vote in the U.S. House of Representatives last week, but few tax practitioners are taking the move seriously. In fact, some caution that House passage of the Death Tax Repeal Act of 2015 will only give farmers and family business owners reason to procrastinate.

For the first time in 10 years, the House passed the measure to repeal federal estate taxes on a partisan vote April 16. While the American Farm Bureau and the National Cattlemen's Beef Association praised the move, the measure lacks support in the Senate and its chances of being signed by President Obama are virtually nil, tax experts say.

Many farmers have already benefitted from congressional action that indexed federal estate tax exemptions for inflation since calendar 2011, American Farm Bureau President Bob Stallman acknowledged in a statement. That permanent lifetime limit now runs $5.43 million per individual in 2015 or $10.86 million per married couple and is adjusted annually. But Stallman said repeal was necessary, since farmland values have been appreciating faster than inflation the past few years. Repeal would free money from life insurance premiums and estate planning and allow farmers and ranchers to expand businesses or upgrade their operations.

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Brian Kuehl, director of federal affairs for Kennedy and Coe LLC, a Kansas-based agricultural tax and consulting firm, believes the full Senate is reluctant to conduct piecemeal overhauls to tax provisions, so he's skeptical a repeal bill will pass anytime soon. The Senate is more likely to deal with any changes in conjunction with a comprehensive tax reform package, if not under President Barack Obama, perhaps under the next president, he says.

House Ways and Means Chairman Paul Ryan, the Republican leader on tax issues, has indicated he would prefer to pass a comprehensive tax reform plan this year that simplifies and lowers rates for both companies and individuals. His predecessor proposed a controversial plan last year that outlined major tax code reforms for the first time in nearly 30 years, including new restrictions on agriculture's cash accounting and an end to 1031-tax free exchanges on real estate. Democratic President Barack Obama has said he wants to push forward with a corporate-only tax reform.

"If Congress can't agree on a comprehensive tax reform package, at least they need to do long-term extensions of key provisions," a frustrated Kuehl says. Legislators passed a one-year, retroactive Sec. 179 and bonus depreciation measure that expired Dec. 31, 2014." Both will presumably be extended for 2015, but it's a terrible way to do tax policy. Do you buy a combine or not, if you don't know what the depreciation rules will be?" he says.

Others fret that last week's estate tax vote encourages business owners to procrastinate. "Whether or not they have a plan to address estate taxes, I really worry that it could make people more apathetic about implementing a succession plan," says Kevin Bearley, a tax attorney who specializes in farm business planning with Kennedy and Coe, in Loveland, Colo.

While it's easy to postpone a decision, every farm needs a transition plan, just to make sure the on-farm and off-farm heirs know how the business owner wants the operation to proceed for another generation, he adds.

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Pedro Sanchez
4/21/2015 | 9:42 AM CDT
I am not commenting on the virtue of the law for wealth accumulation, but strictly from a different perspective. I think that Kevin Bearley hit the issue on the head. Right now, most people procrastinate or put off doing anything. If this bill were to pass as is, it would only cement that process, and for the most part, no one would need to do any life estate planning except for a few thousand. I think that you would see land sales dry up completely unless someone needed cash for something, as in my humble opinion, no one would sell and pay the capital gain tax, because they will just hold it in the family until Mom/Dad or both pass away. They then get the stepped up basis to sell and pay no tax. This doesn't even bring into consideration depreciable assets that would potentially be allowed to wait until death to step up and avoid paying any tax on it at all. This law could potentially wipe out an entire generation of decision makers because the elders will hold all the assets until death.