Ralph and Maxine Jones are evangelists for repeal of the federal estate tax, for good reason. Their family operation in Midland, SD, has been impacted four times by the tax (see “A four-time hit”).
Today, Maxine and Shorty have put their ranch property into a limited liability corporation (LLC) and gifted a portion to their two sons involved in the ranch. (Each family has livestock in their own names, but the cattle are run together.) Additionally, the Joneses have life insurance policies to help fund estate-tax obligations upon their death.
But of this, Maxine says the insurance premiums are hefty, as are fees for the lawyer, accountant and financial planner — all of which takes income from the ranch. And with escalating land prices, “There's still concern that our plans and investment in death-tax protection may not be adequate.”
Plus, Shorty adds, asset transfer to the younger generation can be difficult because they generally don't have the financial ability to take ownership. That's particularly true if the ranch needs to purchase additional land to expand — as theirs has — to support family members coming back to the operation.
Escalating land values further compound the problem because the increase is unrelated to its production capability.
Yet, the Joneses say they feel good about being proactive and having a plan in place. “We've found knowledgeable people to work with to help us transfer our ranch to the next generation. They've become good friends,” Maxine says.
They say they've also been fortunate that their four children have been supportive in a potentially contentious issue. Maxine says, “We've talked to all four of our kids, pointing out that the off-ranch ones won't necessarily appear to inherit equally, since the two sons on the ranch have invested their lives into building the estate. They understand and approve, which is vital to family relationships and stability of the ranch in the future.”
From their own experiences, the Joneses say their best advice to other ranchers is to get an estate plan in place.
“Ranchers need to get involved with good financial planners, accountants and estate-tax attorneys they're comfortable with to work out a plan that's best for their particular situation,” Shorty says.
He fears many people have a false sense of security with the current law, which sunsets in 2010. That year, there is no estate-tax liability, but it returns in 2011 at a $1-million exemption level and a 55% tax rate.
Because of increasing land values, the Joneses support a complete repeal of the estate tax rather than simply raising the exemption amount.
“Many people think their farm or ranch isn't big enough to be affected by estate taxes, but the way land values are increasing, it may affect you now and probably will affect the next generation,” Shorty says.
The Joneses are frustrated by the fact the estate tax seems to most burden the middle class, while special loopholes insulate the very wealthy from paying their fair share. They reference a 2003 Congressional report indicating that, utilizing loopholes, a $20-million estate could be liable for less taxes than estates of $2.5-$5 million.
“I'm not sure which offends me most about death taxes — pitting low-income people against the rich to promote the continuation of the death tax,” Maxine says. “Or that the obscene costs of collection and compliance leaves almost no net gain in income for the government while taking the capital that builds personal, local, state and national economic health.”
Rather than having family businesses, like ranches, pay estate tax to the federal government, the Joneses contend it would be more beneficial if those businesses experienced fewer taxes, enabling them to keep their businesses and communities viable. They point out that local spending, with accompanying local taxes paid, turns over multiple times in the community to stimulate the economy, in contrast to estate taxes going into the federal government bureaucracy.
Shorty says, “It would certainly be better for ranches and rural communities if these funds could be used for their benefit. Ranchers could buy better bulls, build a livestock barn, upgrade machinery, or even improve the family home. That would be much better for the cattle industry and rural communities than sending it away to government agencies.”
Kindra Gordon is a Spearfish, SD-based freelance writer and former BEEF Managing Editor.
A four-time hit
Since the time he was a teenager in the 1950s, Ralph “Shorty” Jones can recall his family being affected by the estate tax. He remembers his parents coping with paying estate taxes on the family ranch after his grandfather Tom's death in a 1949 auto accident.
The estate tax may take nearly half a family-owned business's assets — including land, buildings, equipment and money — when it passes to the next generation. Outside the financial burden, Shorty and his wife Maxine say it's an emotional strain on family businesses, with the taxes due within nine months of an individual's death.
“The last thing one wants to do when a loved one dies is worry whether you can pay the death tax!” Maxine says.
Their family ranch near Midland, SD, has endured four estate-tax obligations over the last 60 years. Here's their story.
Tom Jones founded the ranch in Haakon and Jackson counties in western South Dakota in 1890. His son Ralph (Shorty's dad) was born in 1903 and spent his entire life — with the exception of his school years locally and four years away at college — working alongside his father, building, expanding and maintaining the ranch.
When Tom took an off-ranch job to generate extra income during the Great Depression, Ralph and his wife Faye pulled double duty on the ranch — only to be saddled with paying the estate taxes a decade later when Tom died. Shorty says it didn't seem fair his parents had to pay so much in estate taxes when his dad had already been working on the family ranch all his life.
When Ralph died from a stroke in 1978 at the age of 75, the Jones family faced a similar scenario. Although Ralph and Faye had done some estate planning to help the ranch survive for their four sons' families — including dividing the ranch among Shorty and his three brothers in 1977 — there were still large sums to pay for estate taxes.
Since then, the family ranch endured two more estate-tax obligations — when Shorty's mother died in 1993, and when an aunt who had no children passed away. To pay those huge tax burdens, the Jones family sold some assets and acquired more debt to keep the ranch in operation.
Today, Shorty and Maxine have two of their four children working with them on their commercial cow-calf ranch, which also includes a backgrounding lot — and two grandsons and five granddaughters who may want to return to the ranch someday, as well.
They're thankful to see the fifth generation on the ranch and hopeful it will continue. But with the current estate tax in place, Maxine and Shorty say it's a frustrating battle.