They say you can be sure of two things in life — death and taxes. What you can't be so sure of, though, is how the death tax will impact your family and your ranch.
Because President Bush signed the tax relief package last June, many believe that the estate tax is going away, says Frank Brost, a beef producer from Rapid City, SD. “If it were to be reinstated, there would be a huge outcry.”
But the estate tax is not necessarily dead yet.
“It's still an ongoing concern,” says Brost, who is chairman of the National Cattlemen's Beef Association's Tax and Credit Committee. “People need to be made aware that it is still in effect.”
As part of the tax relief package, the value of property you can own at death without a federal estate tax being due rose to $1 million in January. And over the next 10 years that amount — known as the applicable exclusion amount — gradually increases to $3.5 million in 2009 with the tax repealed in 2010 (see Table 1).
But here's the catch. The latest legislation only repeals the estate tax for one year — 2010. After that the tax may come back in full force. That's because all of the tax cuts passed in June 2001 are set to expire at the end of 2010 — thanks to a sunset provision lawmakers included in the bill. (Congressional rules limit debate if the legislation is 10 years or less, and only a majority vote in the Senate was needed to pass the tax cut bill with this provision.)
Some say this provision is a mere technicality and the tax cuts will be renewed before they expire. Others aren't so certain.
To totally do away with the estate tax, this sunset provision needs to be dealt with in this legislative session, says Brost.
“Cattlemen need to keep the pressure on people up for election in 2002,” he says. “They need to keep the pressure on those people who supported the existing legislation.”
According to the Center for the Study of Taxation, the federal estate tax makes long-term growth significantly more difficult or impossible for 70% of businesses after the death of the current principal owner.
“This is just a deterioration, a sucking of capital out of small businesses,” Brost says. “It's got to stop.”
“It would make virtually no sense to not totally repeal it,” he adds.
But others are skeptical the tax will ever be repealed — even if it's just for one year.
“This scheduled repeal of the estate tax in 2010 is a mirage. It's not going to happen,” says Meade Emory, law professor at the University of Washington in Seattle.
“Permanent repeal would be so expensive, and with the federal government now running annual deficits, it seems impossible that Congress will be able to do anything to make the repeal permanent,” he explains.
It all depends on three things, says Neil Harl, distinguished professor of ag economics at Iowa State University. The fiscal condition of the country over the next seven or eight years, who controls the House, Senate and the White House between now and 2010, and the attitude of the American people all affect the outcome, he says.
Both Harl and Emory say they think Congress will act before 2010 and freeze the exemption amount at $2 million.
That amount is politically palatable, Emory says.
Meanwhile, Back At The Ranch
How all of this affects estate owners in the meantime is yet another matter.
The fact that more and more ranches will be removed from the estate tax dilemma during this phase-out period is good news, Brost says.
“Way too many dollars have been spent on life insurance and/or other diversionary processes,” he says. “Too many farms and ranches have been forced to divest land and integral parts because of the death tax.”
Ranchers need to be aware of the increasing credit (Table 1) and make sure their wills reflect that, Brost says.
Harl also advises reviewing estate plans because some will need to be revised. In addition, he says ranchers should expect more changes in tax law in the next few years.
The way Congress left it, there is a huge problem for planners and estate owners in planning their estates, he says.
“The most difficult issue is not knowing what the law will be after 2009,” he says.
And, until 2004, the break for ranch taxpayers is actually pretty modest, Harl adds. That's because the family-owned business deduction already allows ranchers to leave a total of $1.3 million.
“Not until 2004 is there a genuine break for those with business interests — because of the repeal of the family-owned business deduction after 2003 and the increase in the applicable exclusion amount to $1.5 million in 2004,” he explains.
Read more about estate planning issues in “What Hasn't Changed About Estate Planning” on page 62.
Also, to find out just how much your family might be taxed and how your business might be affected by your death, check out the death tax calculator at www.noestatetax.org/calculator.htm. And for the latest details about estate taxes, log on to www.taxplanet.com and www.irs.gov.
Table. 1 Amount of assets in estate effectively exempt from federal estate tax
|2010||estate tax repealed|
|*Updated to reflect Tax Relief Act of 2001 |
What Hasn't Changed About Estate Planning
Regardless of what happens with federal and state tax laws, the need for planning an estate hasn't changed from the family perspective, says Marsha Goetting, Montana State University professor and Extension family economics specialist.
Whether it's what income protections are provided for a surviving spouse or how to divide the ranch when only one of three kids wants to ranch — a host of questions still needs to be answered.
These types of family decisions about succession planning are often ignored because they can be hard to discuss, Goetting says.
“Often families avoid planning because they do not want to deal with the conflict that arises because of the differences among members regarding goals, values and perceptions of fairness and equity,” she says.
In addition, issues like change, money, disability, mental incapacity and death aren't easy to talk about and can cause some denial, Goetting explains.
But before families visit with an attorney, they need to have their goals in mind so the attorney can make specific recommendations about legal tools to achieve those goals, she says.
“Transferring Your Farm or Ranch to the Next Generation,” a publication that encourages the younger and older generations to examine their expectations about the planning process, is available for $2 from Montana State University Extension. For a copy, write to Extension Publications, P.O. Box 17240, Bozeman, MT 59717-2040.
More information is also available online at www.montana.edu/wwwpb/pubs/estate.html. Or, contact the family economics specialist or the farm management specialist at your local Extension office.
— Diana Barto