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DAVID KRUSE

By Staff | Jun 5, 2015

U.S. Rep. Kristi Noem, R-SD, did a good job of using her family’s experience with the estate tax in her argument that it be repealed. Her Dad died in a farm accident creating a family tragedy and crisis that took them 10 years to pay off the loan for the estate tax liability.

If people have time to plan, the estate tax could be described as the dumb tax as there are provisions for structures where wealth can be shielded, but take time to become vested. In the case of Noem’s family, an unexpected death robbed them of the time they needed and they were caught by that.

One way to avoid that is pretty simple. It’s called life insurance. If you have the wealth beyond the $10+ million joint exemption, you have the resources to put together an estate plan to protect against the potential liability on assets exceeding the exemption. Taxable estates can come as a surprise.

Farm families who never dreamt a decade or so ago, that they would incur an estate tax liability, found themselves far north of the exemption after the run higher in farmland values occurred. That also flies in the face of the big argument against an estate tax always fronted by those who want to kill it that taxes have already been paid on this wealth. Taxes were paid on some of the estate, but not on all of it, and in many cases just on a minority of the estate.

The other issue that is huge that I rarely ever hear those who want to repeal the estate tax address, is what they would do with the stepped up basis now imbedded in current law coupled with the estate tax. A lot of these estates will get sold as farmland moves to the next generation and the heirs are far flung. They would incur a large capital gains tax liability if sold were it not for them being allowed to step up their basis on land at the time of death. If the estate tax goes away, so will the stepped up basis. That could create a potentially larger tax liability for heirs then they have now with the exemptions in the estate tax law. In my opinion, it doesn’t make a lick of sense to give up the stepped up basis to eliminate the estate tax.

I think that much of the opposition to the estate tax is guttural and they are not taking all the consequences into account. I can’t believe that anyone who has actually sat down with an estate planner could think that the current system is unworkable. There is also higher risk if they change it. It will be made worse, instead of better.

Just the .01 percent pays an estate tax now, and they owe something to the country that allowed them the opportunity to create such wealth, and “no” they have not paid taxes on all of it. A lot of farm families who have no estate tax liability under current exemptions and trust provisions would instead incur capital gains liability as a result of the increase in farmland values if the stepped up basis is lost when heirs sell a farm. I don’t believe that Congress will eliminate the estate tax and keep the stepped up basis. Do they think that no one will sell these farms?

The Wall Street Journal wrote, “Republicans also argue that the tax leads many thousands to engage in wasteful and complicated estate planning to minimize their exposure.” Are they arguing that rich people are stupid, poor or lazy so ought not to be bothered with taxes … which is it? It appears to me that those that oppose “the death tax” are counting on support from those who don’t understand it.

My family has stepped up its basis on land for two generations now and land price increases would create a far larger capital gains tax liability than estate tax liability over the time since. Additional capital gains tax liability has been incurred from higher farmland values so stepped up basis will be important to our next family generation, too. We have second to die life insurance policies that were affordable that I would recommend to the Noem family. The estate tax law encourages aggressive gifting which I think is a positive thing and there are trust structures that are not that complicated to shield wealth above the exemption.

The system that we have is manageable unless you are what the Republicans seem to think that you are. The only two sure things we have about life are death and taxes. The man upstairs manages the first one but quite frankly the second one can be handled by the living and is not unreasonable given the exemptions and planning tools that are available.

What the estate tax law has lacked up until this point is certainty. They are always hoping they can live forever or have Congress make it go away which is the worst estate plan that they can have, especially if the heirs are not farmers.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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