Death Tax

If you plan to die, 2012 may be the year to do it. If you have been reading my blog you know about the  changes to the tax code that are due to take effect as of 1/1/2013. The 2012 budget was passed upon the condition that a balance budget would be be required (sequestration) beginning in 2013. This is going to sound weird, but one of the tax laws that will be repealed is the death tax law that reduced taxes on inheritance. The law was a tax cut, not a tax law.

Those who die between now and the end of the year will be permitted to transfer $5.12 million to their heirs tax free. However, those that die in 2013 will only be permitted to transfer $1.0 Million to their heirs (Source: Treasury Department).

I must tell you that I hate the death tax, and so do most farmers. The value of a property large enough to produce crops and revenue to sustain a family of 4 is likely to have an asset value of $5 Million. As a result, when the patriarch of a farming family dies, the family is forced to sell the farm or part of the farm to pay for the taxes. This tax is an epidemic that tears away at the family fabric of our nation.

This not only happens to farmers, but it happens to small business owners across America. Families have to sell the corner store that has been in their family for generations to pay the taxes. These small businesses do not have cash, they have an asset value. The only other choice that a family may have would be to take out a loan on the business to cover the tax. This is nearly impossible with today's banking standards where a small business is only likely to get a credit line of 10% to 20% of the total asset value. In other words, the loan value of the asset is less than the death tax amount.

The death tax erodes family financial stability in America.

There is a commercial on TV by an insurance company whose tag line is "What's your number?" It begs the question, "How much do you need to retire?" This is a really important question for every household. Today, the working class is paying for healthcare and living assistance for 100 Million Americans that are poor, disabled or retired. The cost is $2.2 Trillion per year. Out total receipts from taxes for 2012 is expected to be $2.4  Trillion. By the way - the nation pays $200B to service interest on our national debt - so before the Federal Government pays for anything beyond entitlements, it is out of money. (Here is a post that summarizes this.)

In my mind, the death tax is the most unfair tax we have. It strips away generations of family savings and destroys small family businesses.

Clearly, taxes need to be raised in America. But that is not all. We need to solve deficit spending by working on two fronts: raising revenue and cutting expenses. We need politicians that have the guts to cut entitlements - Medicare, Medicaid, Social Security ($2.5 Trillion). The rest of the Federal Budget is only $1.3 Trillion (Safety and Defense, Federal Employees, Federal School Funds, etc). In the grim eye of this reality, I do not believe that the threshold from inheritance should be moved from $5 million to $1 million because of the destruction to farmers and small business owners. This is a tax on money that has already been taxed, and that is the worst type.


  1. Interesting comments regarding the estate tax issue. While the threshold is targeted to reduce to $1M due to sequestering and the end of the Bush tax cuts, I would not expect that to happen. Congress may be dis functional, but not totally stupid. I would expect the amount to be continued at $5M. At this level less than 0.6% of estates would pay an estate tax (based upon the percentage in 2006 with the $5M threshold). Not a large number, but it still produces about $70B in tax revenue. One would have to be a pretty big farm or small business to get to this Threshhold.

    Based upon friends we know that have farms in ND they have handled the estate tax by incorporating where the corporation is closely held by the family. So no estate tax. Also where the patriarch has died the estate goes to the widow (who is normally younger) and no estate tax is due. There are also some exemptions for farms and small businesses. Generally the value of the farm has appreciated value of buildings and land which is categorized as unrealized income. In this case the tax on the farm is the 15% capital gains tax. Which Ryan wants to drop to zero.

    So while I would generally prefer the estate tax to go away it would produce a significant problem in that some other taxes would have to produce the $70B. That would be a tx increase which could only come from one place the top 10% earners, and we know where that stands. Maybe if the Bush tax cuts are extended except for the top earners the estate tax could be dropped and the revenue lost covered by the top earners.

    Interesting where the estate tax came from and why. In the mid 19th century there was a concern that the US was producing a bunch of idle rich that lived on their inheritance. Most of the businesses at that time were farms. The US was heading down the path of Europe where the land barons had the wealth and their heirs were spending the weather without creating any new farms or businesses. The US congress saw that as a problem so instituted wealth distribution by taking from the rich to help the poor. So wealth distribution is not something new.

    In the US the farm generally went to the oldest son. With large families needed to run the non mechanized farms that left the rest of the sons out in the cold. The option was to divide up the farm like the French did after their revolution which is why so many vineyards in Burgundy are small to this day. In the northern US the homestead act produced free farms of 160 acres called a section since it was one fourth section of a square mile. That was about the size needed to serve a family. If a farmer had the money he would buy another section so that when he died each of his sons, if he had two, would have a section. Over time more and more small farms were sold so that farmers in ND had a square mile of land and were able to farm that with mechanization. The land significantly appreciated in value so that the threshold of $1M had to be increased to $5M by The Bush tax cuts.

    So, a little history lesson as to where we have been. Some farms are very profitable, if the weather cooperates, so that a tax on income could make up for the estate tax revenue. That probably where it should go.

    Another issue regarding farmers. A number of large acres farmers that we know in ND have incorporated. In some years These multimillionaires have received crop subsidies of $250K if they do not plant anything and let it summer fallow. There is something wrong there, but with so many senators from farm states that want to get reflected they are not willing to change the situation. They get reflected by Tea Party. Something a little rotten in Denmark so to say.

  2. By the way I forgot to comment on your comment regarding a tax on a tax. Regarding most farms, the value of the business is the value of the land and buildings. Because of inflation this is classified as unrealized capital gains. As with most businesses the value is also based upon the actual and potential revenue that can be achieved from the property or business, generally some multiple. This is taxed as capital gains when sold. While one may have used post tax monies to buy the property the increased valuation due to inflation was not a tax issue so one can not state that the estate tax is a tax on a tax on a tax.

  3. Thanks for the comments Barry.


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