Noem proposes death to estate tax
February 1, 2017
The cruel shock of the death tax hit hard for Kristi Noem and her family when her dad died in a farm accident. Just a college student at the time, Noem returned home to run the farm. But then the IRS came calling – asking for cash the family did not have.
The family was able to secure a loan to eventually pay off the tax, but the sting of this double blow was what drove the U.S. Congresswoman from South Dakota to later enter politics. This month Rep. Noem (R-SD), along with U.S. Congressman Sanford Bishop (D-GA), introduced legislation to permanently repeal the death, or estate, tax. The legislation is also being introduced in the Senate by Senator John Thune (R-SD).
Rep. Noem says first and foremost she rejects the death tax on the principle that it is a double tax. "Families asked to pay the death tax have already payed taxes on their estates," she said in a provided statement. "Moreover, this is a tax that disproportionately impacts farmers, ranchers, and small businesses who may have a large number of assets – such as livestock, land, and machinery – but would have to sell off needed equipment or take out a loan to pay the IRS bill."
The death tax was set to sunset in 2010, but in negotiations informally known as the "Obama-GOP tax deal," it was brought back to life. Now with President Trump and Republicans in Congress having expressed addressing the death tax as a priority, Noem and her colleagues have hopes this time they can axe the tax for good.
“Families asked to pay the death tax have already payed taxes on their estates. Moreover, this is a tax that disproportionately impacts farmers, ranchers, and small businesses who may have a large number of assets — such as livestock, land, and machinery — but would have to sell off needed equipment or take out a loan to pay the IRS bill.” Rep. Kristi Noem, R-SD
Currently the death tax is only implemented on estates belonging to an individual valued greater than $5.45 million, or about $14 million per couple. These exemption amounts have increased significantly from 2001, when they were $650,000 per person. The tax is only paid on the amount over the limitation, but can be up to 40 percent.
Although this change over the past 15 years has greatly limited the amount of farm and small business families adversely affected, the problem lies in the nature of appreciation of land values.
John Youngberg, executive vice president of the Montana Farm Bureau says their organization's position matches that of the American Farm Bureau Federation and most other ag organizations.
"Because the value of our land has escalated so much; many of our folks are land rich and cash poor," he says. "When they pass on or try to pass their inheritance to their heirs, things they didn't pay that much for end up having a lot of value. When it comes time to pay the tax, the money is all tied up in the land. They have to liquidate part of the land."
USDA data comparing land values of South Dakota farm real estate and cropland from 2006 to 2016 shows farm real estate has appreciated $1,570 per acre since 2006 – an increase of 231 percent, and cropland values have appreciated $2,480 per acre – an increase of 238 percent. With the 2016 exemption of $5 million (the exemption level rises each year for inflation) any South Dakota farmer with more than 1,420 acres of cropland would have been impacted.
Although land values in the more arid states west of South Dakota may not meet similar valuations, the principles are the same. Most ranches and farms are put together to work interdependently as whole units. It's not feasible to simply sell off sections, or just liquidate inventory like other business models. Additionally, most ag operations hold their equity in assets, not cash.
Proponents of the death tax have long argued that the purpose is both for federal revenue (although opponents argue its contribution to the federal coffers is a small percentage) but more so, to break up and redistribute wealth.
Mark Cain is the founder of Cornerstone Financial based in Billings, Mont., but with a regional customer base around Southeastern Montana and neighboring states. He explains it succinctly: "The death tax was designed to break up the big family monopolies, and force them to sell some of their assets to allow someone else a chance at them."
But that's not to say he agrees with it. "Any tax we get rid of it's a good thing, but when the country's broke, you have to figure out something to replace it."
Cain's work involves meeting with families, many of them farmers and ranchers, to conduct estate planning, which also includes finding ways to minimize estate taxes. With the higher limits, and exemptions like portability (which means any unused tax exclusion from a deceased spouse can be transferred to the surviving spouse), which was implemented in 2010, Cain says the majority of his customers do not risk being affected.
"When I started the death tax was $600,000, and so it was a huge part of our planning," says Cain. "Now it doesn't affect a lot of people." For those who may be affected, however, Cain helps with options such as creating life estate deeds, life insurance, charitable giving, foundations, and other strategies.
National health care strategist and Forbes magazine contributor, John C. Goodman, referenced a popular policy paper on the estate tax by economics historian Bruce Bartlett. Bartlett is quoted: "So effective are the methods of avoiding estate taxes that it has been argued the estate tax essentially is a voluntary tax. In the words of economist George Cooper: 'The fact that any substantial amount of tax is now being collected can be attributed only to taxpayer indifference to avoidance opportunities or a lack of aggressiveness on the part of estate planners in exploiting the loopholes that exist.' Economists Henry Aaron and Alicia Munnell put it even more bluntly. In their view, estate taxes aren't even taxes at all, but 'penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners.'"
So if you can't move it – work around it.
"Basically the bottom line is there is a lot of stuff you can do but you have to get a team of professionals together and decide what you want to do and then do it," Cain says.
Although the implications of the estate tax aren't as threatening as they were when Noem faced her family's loss, farmers and ranchers aren't wrong in feeling a bit victimized.
"Although this is probably a better situation than what we've had before, the death tax is still a fairly low hanging fruit," says Youngberg. "And of course, the best tax is the tax that somebody else pays. When you start looking at the people who are hit by the death tax, for those of us in agriculture, we all know it's a better deal [to eliminate it], but we're such a small percentage."
A small percentage that all agree the time is right to put the estate tax in the ground.
And this time, throw the dirt on top.