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Estate Tax Dilemma

Posted Dec. 1, 2009

Many Americans have experienced considerable fluctuation in their net worth during recent months. People who had invested in stocks through 401k accounts or IRAs watched values melt away during much of 2008 and early 2009. Since March 2009, many investments have experienced strong performance while others have emulated a roller coaster ride. A bright spot for many in agriculture is that agricultural land values appear to be steady to only slightly weaker in most regions of the country. Even though investment advisors recommend diversity in one's portfolio, average agricultural producers have 87 percent of their wealth invested in land and improvements. This has been a good strategy during recent years of financial volatility. Regardless of one's investments or the size of one's estate, attention should be given to planning for the estate's future.

Most people have preferences concerning how they want their estates' assets distributed. This can be accomplished by creating legal documents to ensure that those preferences are carried out. This is important no matter the size of the estate. There are additional reasons for planning if one's estate is more than $1 million. In 2001, Congress passed estate taxation legislation. At that time, an estate valued at more than $1 million was subject to an estate tax. There was essentially a $1 million tax exemption. The tax rate was as high as 55 percent for very large estates. The legislation allowed the estate tax exemption to increase incrementally to $3.5 million by 2009 with a tax rate cap of 45 percent. It also stated that in 2010 there would be no estate tax on any size estate. In 2011, pre-2001 exemption levels of $1 million would be reinstated and the maximum estate tax rate would go back to 55 percent.

In recent years, there have been many producer organizations lobbying for permanent repeal of the estate tax. However, record federal deficit projections have caused many to doubt the possibility of permanent repeal. Considering federal deficits, it is unlikely that any lapse in the estate tax will happen - 2010 included. With 2009 drawing to a close, little time is left for passage of estate tax legislation. Currently there are five bills that have been introduced, one by a senator and four by representatives.

  • Senate bill 722 extends the current exemption with future adjustments for inflation, keeping the maximum estate tax rate at 45 percent.
  • House bill (HR 2023) would reduce the exemption to $2 million, but allow the amount to increase with the rate of inflation. The maximum estate tax rate would be 55 percent.
  • House bill (HR 436) extends the current exemption level of $3.5 million and maximum estate tax rate of 45 percent, but has no provision for increasing the exemption with inflation.
  • House bill 3905 increases the exemption in 2010, rising gradually to $5 million by 2019. After 2019, the exemption would be annually adjusted for inflation. The maximum estate tax rate declines from the current 45 percent to a maximum of 35 percent in 2019. This bill has 16 co-sponsors.
  • House bill (HR 3524) would exclude "qualified farm land" from the taxable value of the estate. Qualified farm land is that which was used by the decedent or their family to produce agricultural commodities in at least five of the eight years preceding the death. HR 3524 has 51 cosponsors - including two from Oklahoma and five from Texas.
  • It will be interesting to follow the debate of these bills and others that may be introduced. It is important for each of us to stay informed of pending legislation. Changes in the law may require updates to one's estate plan.