Estate tax reform sees movement with Senate bill

Issue Date: July 21, 2010

By Christine Souza
Assistant Editor

Congress knows it has to take some action on the estate tax before the year is out, but it is having trouble getting there. Meanwhile, farmers, ranchers and estate attorneys are having a hard time planning for the future.

Time is running out for Congress to legislate a new estate tax before next year when it will return to the pre-2001 rate of a $1 million exemption for individuals ($2 million for couples) with the balance taxed at 55 percent.

Two generations of the Koopmann family at the Sunol cattle ranch started by Tim Koopmann's grandfather in 1918. Tim and Melinda Koopmann have worked hard to pay thousands of dollars in federal inheritance taxes to save the ranch for the next generation that includes their two children, at left, Clayton and Carissa.

“We need to put pressure on our members of Congress to act soon and to pass meaningful estate tax relief,” said Paul Wenger, president of the California Farm Bureau Federation. “With so few legislative days left on the congressional calendar it is critical that our elected officials take action before the estate tax reverts to pre-2001 levels.”

Two U.S. senators took the initiative last week, introducing a proposal that would provide a $5 million exemption per person with an index for inflation, and gradually drop the tax to 35 percent. The measure by U.S. Senators Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz. would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending Fund Act of 2010. It would also provide a “stepped up basis” for inherited assets. The Lincoln-Kyl amendment instructs the Senate Finance Committee to offset the difference in revenue loss between the Obama administration’s proposed 45 percent estate tax rate with a $3.5 million exemption amount and their proposed reform.

Senators Lincoln and Kyl introduced a similar measure in April 2009 that received broad bipartisan support and passed as a non-binding congressional budget resolution.

Although Wenger is in favor of the proposal by the senators, he stressed that the California Farm Bureau Federation would also like estate tax relief added that more closely reflects estate tax legislation sponsored by California Congressman Mike Thompson, D-Napa. The Thompson bill, the Family Farm Estate Tax Relief Act of 2010, reintroduced in late May, would exempt farm and ranch assets from estate tax settlements as long as the property remains as a family agricultural operation.

Pointing out that more than 95 percent of California farms are operated by families, individuals, partnerships or family corporations, Wenger said the Thompson bill goes a step further by ensuring that agriculture is preserved for future generations.

“The Thompson bill keeps the ‘family’ in family farms, by assuring that family members can pass their farms and ranches to the next generation,” Wenger said. “No issue hits home more personally for family farmers and ranchers.”

Farm organizations say that returning to the previous estate tax levels would cripple a family’s ability to pass a farm or ranch to the next generation.

When a death occurs in a farming family, the remaining family members must often re-mortgage the farm or sell some or all of it, to pay the estate tax. Someone with personal experience with this is fourth-generation cattle rancher Tim Koopmann from Alameda County. He manages the family ranch in Sunol that was established by his grandfather in 1918.

After his parents died in the early 1990s, Koopmann’s family owed $750,000 in federal inheritance taxes. To continue farming on the 850-acre ranch, he sold his development rights and in return, agreed to protect wildlife on the land.

“Through the sale of the two conservation easements on the ranch, we have been able to settle the estate tax, but it’s been an ordeal,” Koopmann said. “I watched my dad suffer so tremendously through what he went through when my grandfather passed away that I watched him become physically ill. Going through this process was a real strain on all of my family. The estate tax is wrong even if it impacts only one American family in an unfair and dream crushing manner.”

Estate planning attorney Mike Gianelli of Gianelli & Associates in Modesto, who has 35 years of experience in his profession, knows just how difficult estate taxes and succession planning can be for families.

“When I started law in 1978, I represented a family…the father and mother had passed away and the son had inherited about 3,000 acres of walnuts. Three things hit at the same time: estate taxes, a flood that wiped out about one-third of the orchard, and they had just installed solid set sprinklers,” Gianelli said. “He lost the entire farming operation because of estate taxes and up to that point they had had no debt against the farming operation. He just couldn’t survive it. Estate taxes are particularly devastating to farmers no question about it.”

What is especially difficult for Gianelli and other professionals like him is a lack of direction from the federal government up to this point.

“In the 35 years of doing this, I have never seen anything like this. If you’re an estate planning attorney right now you don’t even know what to advise your clients,” he said. “Clients realize that this year there are no taxes and next year they are going to come back with a vengeance unless Congress does something. It is absolutely ridiculous that our legislature allowed this to happen because they knew that 2010 was looming large.”

One of Gianelli’s concerns is if Congress passes legislation that makes the estate tax retroactive to Jan. 1, 2010.

“I have about five estates that I’m handling that would have been subject to estate taxes if we would have had a $3.5 million exemption, but right now there are no estate taxes,” Gianelli said. “If they try to pass legislation that is retroactive to Jan. 1, it is going to get challenged. The longer they wait, the more likely the taxpayer is going to win that challenge.”

Until estate tax legislation is passed that would exempt farm and ranch assets, Gianelli said those potentially impacted should seek professional guidance to see how it affects their personal situation.

“Many farm families have kind of an old world mentality. There are so many that just haven’t taken the time or effort to really do what they need to do from an estate planning point of view and they haven’t looked ahead as far as transitional planning,” Gianelli said.

With estate taxes due nine months from the date of death, it is not always easy for a farm family who is basically land rich and cash poor, to generate the funds needed to cover the taxes, Gianelli said.

“There are two statutes that help a farmer. There’s 2032A that allows the farmer to get some relief on the value of their property, in other words to have the property appraised based on its value as a farm rather than its highest and best use,” Gianelli said. “And 6166, which means a farm family can qualify for installment payments. If you can’t pay it, you’ve got no alternative but to liquidate the family farm for whatever price you can get.”

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

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