The politicians currently scheming to repeal the federal estate tax — America’s only tax levy on grand concentrations of private wealth — don’t have any good arguments to make. They have only bogus sob stories. The most bogus of them all: the claim that the estate tax is forcing hard-working farm families to sell their beloved farms.
The repeal crowd has been circulating this canard for years – and frightened many farm families in the process. But let’s get real. This family farm story holds absolutely no water whatsoever.
Let’s start with the basic number of farms valuable enough to subject their owners to estate tax. This figure is currently running about 30 each year. For the entire country. That’s less, on average, than one farmer per state.
So hardly any farm families actually face any estate tax liability. But are those who do face this liability getting taxed unfairly? Are family farm heirs being forced to “sell the family farm”?
No, not even close.
You need to be ultra-wealthy in America today — have a net worth over $11 million — to be subject to the federal estate tax. Only two out of every thousand Americans reach that level of wealth.
Farmers don’t reach that level of wealth by farming. They reach it by making really lucky investments in land.
The most typical scenario: Grandpa acquires 1,000 acres or so 30 miles outside of town for a couple hundred bucks an acre. The farm succeeds, at least enough to pay the bills decade after decade.
The town grows into a big city. The farm once 30 miles outside town now stands in the path of progress. What would developers pay to cut Grandpa’s acres up into quarter acre lots for upscale suburban homes? Maybe $100 million or more.
And that’s how Grandpa became wealthy — and subject to the wealth tax. He made a fantastic land investment. Farmers like Grandpa have become our modern-day Jed Clampetts, except they stumbled onto their wealth from land, not oil.
This basic reality makes it a bit difficult to shed tears for estate-tax paying farmers or, really, their kids. And grandkids.
But what about the claim that estate tax liabilities end up shutting down family farms like Grandpa’s?
Let’s take a closer look at Grandpa’s situation. He stopped farming years ago. Dad and Uncle Bill run the farm these days. When Grandpa dies, they’ll be approaching retirement themselves. So the question really becomes: Will Junior and his siblings and cousins be able to continue the farming operation, or will the estate tax put them out of business? And what about Dad and Uncle Bill? Will they be able to retire comfortably?
Rest assured, Grandpa’s kin will all do just fine. Under current tax law, the family has three very comfortable options, courtesy of three very favorable provisions designed to help the heirs of wealthy farmers.
When a family farm represents more than 35 percent of the value of a person’s estate, no estate tax is required on the farm for five years from the date of death. Dad and Uncle Bill, in other words, won’t ever have to sell anything right away.
If Dad and Uncle Bill so chose, they could sell off enough acreage during those five years, about 400 acres, to pay the estate tax in full. That would leave them and the kids with two options. If nobody in Junior’s generation wants to continue farming, the family could sell out and live happily ever after on $60 million or so of family wealth.
And if Junior’s generation wants to continue farming? Not a problem. Current tax law allows for tax-free exchanges of real estate. The family could take those 600 or so remaining acres and exchange them for ten times or more that many acres farther from the city.
But what if, for whatever reason, the family doesn’t want to sell any land? Grandpa’s heirs could still make it work. Even after the fifth anniversary of Grandpa’s death, current law does not demand the entire estate tax due. Instead, heirs can pay off the tax bill in ten annual installments, with the unpaid balance accruing interest at a very low rate.
Truth is, ultra-wealthy farming families can achieve — under current law — any economic outcome they may seek save one: They cannot sell family farms that have over the decades appreciated by tens of millions of dollars and escape, at the same time, both the income tax on that gain and estate tax on the value.
Which is precisely why ultra-wealthy farming families are seeking to repeal the estate tax. This whole repeal business has never been about farming. It’s always been about selling highly appreciated land for development and not paying a nickel in tax. In other words, it’s about the wealthy not paying their fair tax share.