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Commentary: Estate tax poses clear threat to nation’s family farms

Issue Date: October 28, 2020
By John Newton
John Newton

Estate taxes are a tax on the transfer of property following a death. The Tax Cuts and Jobs Act of 2017 included an estate tax exemption that requires an estate to file and pay taxes when gross assets exceed $11.58 million per person. But after Dec. 31, 2025, the exemption amount returns to the previous $5 million per individual, adjusted for inflation. Earlier law had gradually raised the exemption to $3.5 million.

Farms with assets above the estate tax exemption often must liquidate some of those assets to meet estate tax obligations, which can reach as high as 40% of the taxable amount. A limitation on the exemption means that each year, fewer farm families will be protected from the estate tax—a clear risk to the continuity of family farms.

To preserve these family farm operations, serious consideration should be given to eliminating estate taxes or at least making permanent the current inflation-adjusted exemption. By eliminating estate taxes, or making the current exemptions permanent, U.S. farmers and ranchers would be able to avoid, at least partially, liquidating inherited farm assets to meet the death tax's obligations.

During 2020, the national average value of farm real estate, including all land and buildings on farms, was $3,160 per acre. Based on this, it would take approximately 3,700 acres to reach the current $11.58 million estate tax exemption.

If the current estate tax exemption level is not made permanent, the estate exemption would fall to an inflation-adjusted $5 million in 2026. In 2020 dollars, that would be approximately $5.8 million, pushing the threshold for triggering the estate tax down to approximately 1,800 acres. If the exemption were reduced to $3.5 million, it would require slightly more than 1,100 acres to reach the exemption level.

At the state level, the impact of the estate tax limitations varies, based on the average farmland value and farm size. Western states with larger family farm operations are more likely to be impacted by estate taxes. As the exemption falls, it takes fewer acres to reach the estate tax exemption level. In California, an average 1,158 acres would be needed to meet the current exemption level; for the potential $5.8 million exemption, the acreage level falls to 580 and for a $3.5 million exemption, to 350.

At the national level, the current estate tax exemption would impact approximately 4% of family farms; at the state level, the percentage varies significantly. For example, at $11.58 million, as many as 12% of Nebraska farms and 11% of both Illinois and Montana farms operate enough acres to be above the estate tax threshold. In California, the proportion is 6%.

Should the current exemption expire in 2026, more than 20% of farm operations across Illinois, Iowa and the Dakotas would likely operate acreages above the estate tax thresholds; in California, the proportion would be 11%. Potential reductions in the exemption to as little as $3.5 million would disproportionately impact larger family farm operations, especially those operating highly productive agricultural land; in California, about 16% of farms would exceed that threshold.

The percentage of farmland operated by farms potentially above the current estate tax threshold is more than 70% in many Western states; in California, it's 76%. In these areas, the largest family farms would be more likely to have to liquidate assets to meet estate tax obligations.

Should the current exemption expire, the $5.8 million estate tax exemption would potentially impact operations owning 85% of California farmland. At a $3.5 million exemption, 91% of California farmland could be subject to estate tax obligations.

The death tax's threat to family farms and the agricultural businesses and rural economies that rely on them is clear. When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners may be forced to sell land, buildings or equipment needed to keep their businesses running.

The current estate tax exemption of $11.58 million is set to expire at the end of 2025, dropping the exemption to $5.8 million. It's also possible congressional lawmakers will try to further reduce the exemption, making it even more difficult for family farms to survive the death of a loved one.

Given the demographics in agriculture, it's critical that Congress eliminates the death tax, or at the very least makes the current exemption permanent, so family farms across the country can continue their agricultural legacy.

(John Newton is chief economist for the American Farm Bureau Federation. This piece was adapted from an article on the AFBF Market Intel blog.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.




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