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Brett Andrews PFP 6080 
 Estate
Taxes
and
Family
Farms
 
 Introduction
 Around
this
time
of
year
I
start
getting
a
lot
of
tax
questions
from
my
friends.
They
know
 that
I’m
studying
accounting
and
use
me
as
a
tax
resource.
Although
I’m
definitely
not
an
 expert,
most
questions
are
simple
ones:
Should
I
file
this
year?

or,
What
is
the
American
 opportunity
credit?
Most
of
the
time
I
already
know
the
answer
to
the
question
or
know
where


Unknown 4/23/12 11:17 AM Deleted: m

to
find
it
easily.
Recently
though,
I
had
a
question
that
was
a
little
more
challenging.
A
good
 friend
approached
me,
she
was
a
little
frustrated,
her
grandparents
had
been
transferring
some
 shares
in
their
farm
to
her
every
year,
and
she
was
paying
taxes
on
the
income—income
that


Unknown 4/23/12 11:18 AM Deleted: ,


she
was
not
receiving.
She
didn’t
understand
why
her
grandparents
had
been
doing
that,
she
 thought
it
was
just
some
tricky
way
for
them
to
avoid
paying
taxes.



Since
I
knew
a
little
about
estate
tax
planning
I
was
able
to
recognize
that
they
were


Unknown 4/23/12 11:19 AM Deleted: d

gifting
those
in
small
amounts
of
the
farm
to
her
every
year
in
order
to
eliminate
or
at
least
 lessen
the
estate
tax
burden
she
and
the
rest
of
her
family
will
be
subject
to
when
her
 grandparents
pass
away.
I
was
able
to
explain
to
her
that,
while
her
grandparents
are
doing
this
 to
avoid
paying
taxes,
it’s
not
for
their
benefit
it’s
for
hers.
Since
at
the
time
my
knowledge
on
 estate
tax
planning
was
limited
I
decided
to
do
a
little
research
on
it
in
order
to
get
a
better
 understanding
on
estate
taxes
for
family
farms.



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to

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Brett Andrews PFP 6080 
 The
History
of
Estate
Taxes
 The
estate
tax
was
born
when
congress
passed
the
Revenue
Act
of
1916.
The
purpose
of


Unknown 4/23/12 11:21 AM Deleted: W

Unknown 4/23/12 11:21 AM

the
tax
was
to
raise
revenue
and
shift
more
of
the
tax
burden
to
the
wealthy.
The
estate
tax
has


Deleted: 
the
estate
tax
was
born

gone
through
many
changes
since;
perhaps
the
most
significant
change
was
the
Tax
Reform
Act


Deleted: .


Unknown 4/23/12 11:21 AM

of
1976.
The
Tax
Reform
Act
of
1976
unified
the
estate
and
gift
tax
framework.
Prior
to
1976
 wealthy
tax
payers
could
greatly
reduce
their
tax
by
gifting
their
wealth
before
death
because
 gift
taxes
rates
were
significantly
less
than
estate
taxes.
The
Tax
Reform
act
of
1976
also
 introduced
the
generation‐skipping
transfer
tax.
This
prevented
taxpayers
from
saving
on
 transfer
tax
by
skipping
generations
when
transferring
assets.
This
effectively
created
the
three‐ part
unified
transfer
tax
system
we
have
today1.

 Variations
in
Estate
Tax
Rates
and
Exemption
Amounts

 The
Estate
Tax
Rates
and
exemption
amount
change
almost
every
year.
In
1916
when
 the
Estate
tax
was
first
introduced
the
exemption
amount
was
$50,000
and
the
top
rate
was
1
 percent.
Since
1916
the
tax
rate
fluctuated
a
lot
and
it
has
been
as
high
as
77
percent.
Even
in
 the
past
ten
years
the
rates
and
exemption
amounts
have
varied
greatly.
Table
1
on
the
next
 page
shows
how
an
estate
of
$10
million
dollars
would
have
been
taxed
each
year
over
the
 period
of
2001‐2011:

 


1

(Jacobson, Raub, and Johnson 120-124)

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below


Brett Andrews PFP 6080 Year


Estate


Exemption


Tax
Rate
 Estate
Tax


2001


10,000,000


675,000


55%


5,128,750


2002


10,000,000


1,000,000


50%


4,500,000


2003


10,000,000


1,000,000


49%


4,410,000


2004


10,000,000


1,500,000


48%


4,080,000


2005


10,000,000


1,500,000


47%


3,995,000


2006


10,000,000


2,000,000


46%


3,680,000


2007


10,000,000


2,000,000


45%


3,600,000


2008


10,000,000


2,000,000


45%


3,600,000


2009


10,000,000


3,500,000


45%


2,925,000


2010


10,000,000


Repealed


Repealed


0


2011


10,000,000


5,000,000


35%


1,750,000



 The
table
shows
that
based
on
the
tax
rate
and
the
exemption
amount
the
amount
of
 estate
tax
due
can
vary
greatly
from
year
to
year2.
This
can
make
planning
for
estate
taxes
very
 Sarah Andrews 4/23/12 11:37 AM

difficult,
especially
for
those
whose
property
value
comes
from
land
ownership.

 Effect
of
Estate
Taxes
on
Family
Farms

 Although
the
presumption
is
that
estate
taxes
are
only
for
the
wealthy,
estate
taxes
have
had
 significant
effect
on
small
business
and
family
farms,
especially
for
those
who
don’t
effectively
 plan
for
estate
taxes.
Family
farms
can
have
a
lot
of
appreciated
value;
however
since
they
are
 2

("savewealth.com")

4| P a g e

Comment: I know this is probably not the “accountant” way to say this, but I think a good transition to family farms is necessary here.

Unknown 4/23/12 11:26 AM Deleted: .



Brett Andrews PFP 6080 land
and
property
they
are
also
not
very
liquid.
When
a
farmer
dies
and
leaves
his
farm
to
his
 children
the
farm
is
included
in
the
farmer’s
gross
estate
at
its
fair
market
value.
A
lot
of
the
 time
these
farms
are
worth
millions.
This
can
leave
the
children
with
a
large
estate
tax
bill.
For
 example,
a
farm
worth
$10
million
dollars
in
2009
would
generate
an
estate
tax
bill
of
close
to
 $3
million
dollars.
Since
a
lot
of
farms
don’t
produce
a
lot
of
income,
the
children
would
be
 forced
to
sell
the
farm
just
to
pay
the
tax
on
it.
Furthermore,
often
these
farms
are
sold
for
 much
less
than
their
value
because
of
the
urgency
to
sell.
In
many
cases
the
farm
has
been
in
 the
family
for
years
and
is
the
families’
sole
source
of
income.
It’s
also
very
common
for
families
 to
reside
on
or
near
the
farm.
This
has
been
a
very
difficult
issue
for
many
families
who
inherit
 family
farms3.

 Family
Limited
Partnerships
 Fortunately,
there
are
some
ways
to
plan
for
estate
taxes.
These
planning
techniques
can
 greatly
reduce
and
sometimes
eliminate
estate
taxes
altogether.

One
way
is
to
move
the
farm
 into
a
Family
Limited
Partnership
(FLP).
Moving
the
farm
into
a
FLP
allows
the
farmer
to
gift
 shares
of
the
partnership,
up
to
the
value
of
the
annual
exclusion
amount,
to
members
of
the
 family
while
still
maintaining
control
of
the
farm.
This
also
limits
the
marketability
of
the
farm,
 effectively
decreasing
the
value
of
the
farm
and
reducing
exposure
to
estate
taxes.
Over
time,
 the
farmer’s
estate
is
reduced
as
shares
in
the
partnership
are
transferred
tax‐free.
For
this
 reason,
FLP
greatly
benefits
those
who
plan
well
in
advance4,
and
another
solution
is
on
its
way.



Unknown 4/23/12 11:29 AM Deleted: 
f

Unknown 4/23/12 11:30 AM Deleted: this


Unknown 4/23/12 11:31 AM Deleted: .



 3 4

(Souza ) (Dalton and Langdon 241-244)

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Brett Andrews PFP 6080 Section
6166
 Congress
has
tried
to
ease
the
burden
of
estate
taxes
on
small
businesses
and
family
farms
by
 enacting
Section
6166
of
the
Internal
Revenue
Code.
Section
6166
allows
an
election
to
extend
 the
payment
of
estate
tax
by
paying
in
installments
over
a
14‐year
period.
This
may
enable
 families
to
avoid
having
to
sell
the
family
farm,
however
the
family
will
still
have
to
pay
interest


Unknown 4/23/12 11:32 AM Deleted: 


Unknown 4/23/12 11:32 AM Deleted: y
farms


on
the
tax,
and
the
payments
may
still
be
a
huge
burden
for
the
family
to
pay
from
their
limited
 farm
income5.

 Family
Farm
Preservation
and
Conservation
Estate
Tax
Act

 In
2009,
Representative
C.
Thompson
sponsored
a
bill
called
the
Family
Farm
Preservation
and
 Conservation
Estate
Tax
Act.
The
bill
would
exclude
family
farms
for
gross
estates
if
the
farm
 was
passed
to
descendents
and
was
used
by
the
descendents
for
farming
purposes.
If
the
 family
was
ever
sold
the
farm
or
was
no
longer
used
it
for
farming,
a
recapture
tax
would
be


Unknown 4/23/12 11:33 AM Deleted: decedents

Unknown 4/23/12 11:33 AM Deleted: on

imposed.
Unfortunately,
the
bill
has
not
gotten
very
far
since
2009
and
ti
currently
sits
with
The
 House
Ways
and
Means
Committee6.

 Possible
Elimination
of
Estate
Taxes

 Estate
taxes
have
been
an
issue
discussed
a
lot
in
this
election
year.
Many
republicans
want
to
 eliminate
the
estate
taxes
all
together—most
notably
likely
republican
presidential
nominee


Unknown 4/23/12 11:33 AM Deleted: ,


Unknown 4/23/12 11:34 AM

Mitt
Romney
has
expressed
his
desire
to
end
the
tax.
Those
who
support
the
elimination
of


Deleted: ly

estate
taxes
claim
that
estate
taxes
limit
small
business
growth
and
encourage
consumption


Deleted: ,

5 6

(Dalton and Langdon 467-468) ("Open Congress")

6| P a g e

Unknown 4/23/12 11:34 AM


Brett Andrews PFP 6080 rather
than
saving.
Also,
estate
taxes
are
not
a
significant
source
of
revenue,
they
make
up
less
 than
two
percent
of
federal
revenues
and
cost
approximately
the
same
amount
to
collect
and
 enforce
compliance7.
While
there
is
a
lot
of
talk
about
eliminating
estate
taxes,
there
are
many
 who
support
estate
taxes
and
any
attempt
to
eliminate
them
who
certainly
meet
lots
of
 Sarah Andrews 4/23/12 11:38 AM

opposition.

The
future
of
estate
taxes
is
very
uncertain.



Deleted:

Conclusion

 Estate
tax
is
consistently
changing;
this
can
make
planning
for
it
very
difficult.
Even
so,
for
those
 with
large
estates,
planning
is
vital
in
order
to
avoid
leaving
a
large
tax
burden
with
heirs.
Estate
 taxes
can
be
a
huge
issue
for
small
business
and
family
farms,
and
planning
well
in
advance
may
 be
the
only
way
to
keep
their
business
or
farm
in
the
family.
While
estate
taxation
may
see
 major
changes
in
the
future
and
may
even
be
eliminated,
these
changes
are
uncertain
and
it
is


Sarah Andrews 4/23/12 11:37 AM Comment: I don’t think you mentioned small businesses in the paper before, if you did, great. If not, I would either take this out or be sure to mention it somewhere before the conclusion. Also, is it small business farms and family farms? or is it small businesses and small family farms? If it is just small business, make it “small businesses” and “family farms.”

still
very
important
to
prepare
for
estate
taxes.

 
 
 
 
 
 
 
 


Unknown Deleted:

Sarah Andrews 4/23/12 11:37 AM Deleted:

7

("Reasons to Repeal Estate Tax")

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Brett Andrews PFP 6080 Works Cited â&#x20AC;Š Dalton, Michael A., and Thomas P. Langdon. Estate Planning for Financial Planners. Sixth Edition. St. Rose, LA: Money Education, 2011. 241-244, 467-468. Jacobson, Darien B., Brian G. Raub, and Barry W. Johnson. "The Estate Tax: Ninety Years and Counting." 120-124. Web. 19 Apr. 2012. <http://www.irs.gov/pub/irssoi/ninetyestate.pdf>. Open Congress. Participatory Politics Foundation, n.d. Web. 19 Apr 2012. <http://www.opencongress.org/bill/111-h3524/show>. Reasons to Repeal Estate Tax. Policy and Taxation Group, n.d. Web. 19 Apr 2012. <http://www.policyandtaxationgroup.com/html/repeal.html>. . "Estate and Gift Taxes." savewealth.com. N.p., n.d. Web. 19 Apr 2012. <http://www.savewealth.com/planning/estate/taxes/>. Souza, Christine. "Estate Tax Proposal would help Farm Families." Ag Alert 2 Sep 2009, n. pag. Web. 19 Apr. 2012. <www.agalert.com/story/?id=1375>.

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Tax Paper