With the Bush-era tax breaks set to expire in January, aging farmers and ranchers are one demographic group that could feel the effects of increased taxes more acutely than most.
Local ranchers recently have focused on the estate tax, which will increase to 55 percent if Congress doesn’t take action before January 2011. They said they have seen friends lose their ranches because of the tax. If no action is taken, the tax rate could threaten the future of many local ranches.
The estate tax dropped from a maximum of 55 percent to 45 percent in 2009 as part of the Bush tax cuts. The tax was completely eliminated for 2010, and it is scheduled to resume at the 55 percent rate in 2011.
The majority of farmers’ and ranchers’ assets are tied up in the land, said Barbara Jefferies, president of the La Plata-Archuleta Cattlemen’s Association. When the landowners die, children inheritors can be forced to divide up and sell their parents’ estates to pay the tax, Jefferies said.
“If there is a large estate tax, their kids will essentially have to buy back the land,” she said.
Local estate planner Jim Merriman explained that unlike other citizens who qualify for estate taxes, farmers and ranchers usually don’t have many liquid assets to pay the government.
The heavy burden of estate taxes could very well put the next generation out of the ranching business, Jefferies said.
Lulu Mae Hess said she and her family started working with an estate planner in 1981 to preserve the future of their ranch southwest of Durango. Her family, including five children and 11 grandchildren, meets every year go over the next year’s plans for the ranch.
She said she has seen ranches go out of business because of the burden of taxes.
Keeping ranchers’ concerns in mind, Jefferies asked Merriman to speak at the October meeting of the La-Plata Archuleta Cattlemen’s Association. During his presentation, Merriman offered the local cattlemen ways to reduce or avoid estate taxes.
Dividing estate values and funneling money into trust accounts is a useful tactic for many of the county’s aging farmers and ranchers to preserve the future of their land, Merriman said.
The estate tax is more like a voluntary payment to the federal government because of all the avenues to get around it, he said.
The key is to start planning ahead of time, he said.
One strategy of estate planning is to use the exemption of both husband and wife, Merriman said. A bypass trust, for example, would allow a couple to split up their estate after one spouse dies and put half the money in a trust account.
After the death of the second spouse, the entire estate would go to the children but would not be taxed if both halves are under the exemption.
The Obama administration supports continued income-tax breaks for all but the highest income bracket, individuals who make more than $200,000. The administration’s current plan includes a $3.5 million estate-tax exemption and maximum 45 percent rate. Many Republican and some Democratic lawmakers support extending all tax cuts.
According to the Center on Budget and Policy Priorities, the merits of extending the estate tax exemption are debatable because only a small minority of small farms and businesses have assets worth more than Obama’s proposed exemption of $3.5 million per individual.
The center works on fiscal policy and public programs that affect low- and middle-income populations.
It also reported that eliminating estate taxes for another 10 years would increase the federal deficit by $698 billion over that time, compared to letting the tax return in its pre-2001 form.