Dec 09 2012
Deal needed to prevent rise in farm inheritance rates
By Christopher Doering
Rep. Kristi Noem knows how painful the tax on inheritances can be. Soon more farmers, ranchers and small businesses throughout the state could feel the same.
Noem, 22, was married and almost eight months pregnant with her first child when her father died in a farming accident. Noem was forced to leave Northern State University in Aberdeen to join her brother and sister in taking over the family’s farm-and-ranch operation.
But his unexpected death stuck Noem and her siblings with a large estate tax bill — one they had to take out a loan to pay — so they could keep the several thousand acres the family operated.
“When we were new at the business, and taking over an operation that obviously you weren’t prepared to take over and then to have an additional loan and more debt right off the bat when you’re young, beginning business owners and farmers was a challenge,” Noem said in an interview.
Noem, now 41, said people today planning to pass a farm operation on to a family member are in “a much worse position than we were back then” because of the increase in land values. When Noem’s dad died in 1994, an acre of land in Hamlin County sold for $650 to $800 an acre. Today, some of the same land fetches $7,000 an acre.
If Congress does not act by Jan. 1, the amount excluded from the estate tax would drop from $5 million to $1 million and the tax rate would increase to 55 percent from its current level of 35 percent — the result of an expiration of tax cuts signed by former President George W. Bush. As a result, a deceased person could pass on an inheritance of only up to $1 million compared to $5 million before a tax must be paid.
That means individuals who inherit family-owned businesses and farms that were previously excluded from paying the tax now could be forced to shell out thousands of dollars. Sen. John Thune, R-S.D., estimated that almost 71 percent of South Dakota farms would exceed the $1 million exemption level.
Despite the worst drought in more than 50 years, land prices throughout the U.S., which have tripled in the past decade, have continued to rise as farmers expect to see continued high corn and soybean prices. But as farmland values rise, fewer acres are needed to reach the level where the estate tax must be paid.
“Agriculture does become a victim of its own success,” said Chad Hart, an associate professor of economics at Iowa State University. “It’s something that I know a lot of agricultural families are looking at, especially since the land is the biggest asset, the productive asset that maintains the farm. How do you pass that on without losing” a lot of the farm’s value?
In the past year, ag land values in South Dakota soared 26.8 percent to $1,742 per acre, according to South Dakota State University’s Farm Real Estate Market Survey. It’s the highest annual rate increase in 22 years. The highest cropland values and cash rental rates were in the Minnehaha and Moody county area, where the average value of cropland is above $6,100 per acre.
The American Farm Bureau Federation has estimated that South Dakota farms and ranches larger than 714 acres probably would exceed the $1 million exemption level. At the same time, it would take only about 431 acres for crop producers to surpass $1 million. Cropland used to grow corn, soybeans and other commodities is more valuable than acreage on ranches used by livestock for grazing.
“The impact would be very real, and it could be very, very harsh,” said Thune, who has introduced legislation to end the estate tax. “We want to keep, as much as we can, farms and ranches in South Dakota as family-run operations, and one of the ways you do that is you make it easier, not harder, to pass it on.”
The estate tax is one of dozens of taxes being swept up in the looming “fiscal cliff” discussion — a series of automatic spending cuts and higher taxes scheduled to begin in January unless Congress acts.
A reduction in the exemption and an increase in tax rate could leave farmers and ranchers in a lurch on how to pay the higher estate tax bills. As a result, farmers who take over operations from a deceased family member could be forced to sell their property and equipment or take out a loan to cover the tax payment.
“You’re cash poor all your life, but when you die, you’re all of a sudden rich because you own all this land, but trying to pass it on to your heirs is a real challenge. But now, it’s escalated because of the values of land that we’ve seen,” said Scott VanderWal, president of the South Dakota Farm Bureau. He farms about 1,300 acres with several family members in Volga, west of Brookings
“It can be absolutely disastrous to a family operation if it does happen.”
To read more: http://www.argusleader.com/article/20121209/NEWS/312090031/-Cliff-puts-rural-S-D-edge-about-estate-tax