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Friday, 21 December 2012 07:37 |
 Financial drama is complicating life for next generation of farmers.
By Amy Bickel - The Hutchinson News -
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It's a subject that he and others don't necessarily want to think about, Berry Bortz admits in between working cattle on his Pratt-area farm.
But it's a question that is looming amid the impending fiscal cliff: What will happen when he dies?
His two sons - Brandon and Darnell - want to return to the Pratt County farm where Bortz and his wife, Carla, have made a living. However, a considerable jump in federal estate taxes is expected to happen as the year comes to a close. And with lawmakers having just days left to face the nation's fiscal woes, farm heirs, including the next generation, could see hefty taxes as they try to hold on to the family farm.
"The boys could pay more in inheritance tax than I paid for the ground," Bortz said.
Small farmers affected
The estate tax issue arises because of the impending expiration of tax cuts signed by former President George W. Bush. The clock is ticking as lawmakers work on legislation this week. On Jan. 1, if the tax cuts expire, the amount excluded from estate tax would fall from roughly $5 million a person to $1 million, with a tax rate increase from 35 percent to 55 percent.
For those inheriting the farm, it could mean watching the generational operation be pulled part, with children potentially having to sell off land or other assets to pay the ensuing taxes, say estate attorneys.
Complicating the matter is the recent spike in land prices, said Arlyn Miller, an attorney who does estate and business planning, as well as agriculture law work, for Martindell Swearer Shaffer Ridenour law office in Hutchinson.
In 2011 alone, the value of Kansas' non-irrigated cropland rose 20 percent and irrigated ground increased by 15 percent, according to the Federal Reserve Bank of Kansas City.
Miller said that this year he saw dryland acres in south-central Kansas sell for upwards of $2,500 an acre. Some irrigated land has sold for between $3,000 and $5,000 an acre. That means it doesn't take much for a small farmer or farm widow to hit the million-dollar threshold, he said.
"Two (irrigated) quarters, and you would be over the threshold after Jan. 1," Miller said. "And a farmer who farms two quarters around here, that is not a big farm at all."
According to the Kansas Farm Management Association, which has more than 1,500 farm members statewide, about 48 percent of their members would be affected if lawmakers don't make the Jan. 1 deadline. Those farms have a net worth of roughly $2.1 million.
Another 4.1 million already are over the $5 million threshold, the agency reported this week. Those farms have an average net worth of about $7.5 million.
All told, the potential estate tax would be an average $827,949 per member farm after Jan. 1, KFMA reports.
Some historic context
However, Miller reminds that some historical perspective is helpful, as it wasn't that long ago that tax rates were much higher. In the 1940s to 1960s, federal estate tax rates of more than 70 percent on large estates were in place, at a time when the estate tax did more to pay the bills for the federal government, as well as to reduce the gap between the very wealthy and everyone else.
In 2011, President Barack Obama signed a tax deal that was significantly lower than Bush's levels. In 2000, people who received more than $1 million in inheritance were subject to a top tax rate of 55 percent. By 2009, the top tax rate was decreased to 45 percent and was applied only to inheritances over $3.5 million a person, or about $7 million a couple. Obama's plan currently has an exemption of $5 million, or roughly $10 million for a couple with a rate of 35 percent.
Obama's current proposal is a compromise approach, calling for a 45 percent tax rate for estates above $3.5 million.
According to an article in the Wall Street Journal, the current policy raises roughly $161 billion in revenue over 10 years. Reverting to pre-2001 estate tax rates would raise about $532 billion during the same timeframe, while the Obama proposal would raise $276 billion.
Much attention has focused on other issues of the fiscal cliff, such as reaching a deal on income tax rates. Nevertheless, indecision looms, Miller said. Lawmakers have yet to compromise on a plan to avoid falling off the cliff. Meanwhile, a farm bill also hasn't been passed, either. Some farm programs also expire Jan. 1.
"There is just a lot more uncertainly than before," Miller said. "Is it going to go to $1 million, $3.5 million?
"There are just a lot of questions if they don't get a deal done by the end of the year," Miller said. "The uncertainty, the tremendous growth in land values, makes it that much more important for farmers to be up to date" in their estate planning.
Gifting millions
Clients are bombarding lawyers like Hays' Stacey Seibel, who has done estate tax planning for 16 years. She said clients are giving away millions of dollars before Jan. 1 because of the forthcoming estate tax changes.
"I've been doing this for 16 years and I've never been so busy, ever, from an estate tax standpoint," she said, adding that the onslaught began after the election. "I think everyone was waiting to see how the presidential election would shake out."
Seibel said a couple came in Monday worth more than $22 million with their land and other assets. They formed a limited liability company and the husband and wife both gifted $5 million each to a legacy trust to help avoid hefty taxes for the next generation returning to the farm.
There is a caveat, with an irrevocable trust, Seibel added. It has to be a true gift.
"They can't be in charge of it," she said. "They can't get income from it. Once they set it up, they can't reverse it."
Seibel added that a downside in gifting is the child is liable for any capital gains realized as the property increases in value.
The irrevocable trust is one popular method, she said. Another, with the increase in farmland values, is to do an estate freeze, or freeze the value of the land. For example, an heir can enter into an installment sale with his or her parents. They might set up a 20-year installment and make low-interest payments, with the value never rising despite the current trend.
Seibel noted that those who use up their tax allowance this year, such as the farm couple she worked with Monday, won't get one when they die unless there is a more generous tax law in the future.
Seibel also said that no matter what happens Jan. 1, she and other attorneys don't think those gifting by year's end will be affected by estate tax changes.
Shon Robben, a Manhattan attorney who also practices in the estate planning area, said he has been inundated with clients as well, saying that about 80 percent are farmers trying to avoid the tax change.
The next generation
With sons returning to the farm, Reno County producer Rod Bergkamp said one of his big concerns is uncertainty.
He has worked some with attorneys on his estate, he said, but added, "I'm probably behind,"
His children would be the fourth generation, he said, adding that $3,000 farmland and potential estate tax changes make it more challenging "to get things done, to give it to your kids."
While working on a truck Tuesday, Bergkamp said it seems like the farm inheritance goes to doctors, lawyers and the government - with less for the next generation.
Back in Pratt County, Bortz is looking forward to his children returning to the farm. His great-grandfather settled in Pratt County originally, he said.
Today, the family operation is a diversified cattle and crop operation, which includes registered black Angus, a commercial cattle herd, feeder cattle and a small feedlot, along with crops like wheat and corn.
However, with the average age of the Kansas farmer nearing 60, it needs to be easier to get children back on the farm - especially with the equity it takes amidst the climate of high land prices, grain prices and expensive equipment costs, he said.
"I understand the need to redistribute the nation's wealth," Bortz said, but added, "I don't' want my boys to work 40 years for something I paid for for 40 years."
Who knows what will actually transpire in coming days, he said of lawmakers.
"They are acting like high schoolers waiting until midnight to get the term paper done," he said.
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