Now that the election is over, we urge Congress and the President to get down to the business of compromise. In farm circles, estate taxes should be top of mind in addition to the farm bill.
It has been estimated that 80 to 90 percent of all American businesses are family-owned. That number climbs to over 95 percent in agriculture. In nearly every instance, families pour precious financial resources into the business to help it survive and hopefully thrive.
Once established, family businesses already have many obstacles to navigate. The average operation lasts roughly one generation or 25 years. Only 30 percent of all family businesses make it to the second generation; 15 percent to the third; and 3 percent to the fourth generation.
In many instances, estate taxes, known to most of us as the death tax, can be the final nail in the business coffin. After a lifetime of sweat equity, estate taxes can either tear apart many family-owned ventures or leave them so weak they cannot make the necessary improvements to the operation.
This is why Congress and the President must step up to the plate. Right now, estates have a $5 million exemption for individuals . . . $10 million for married couples with a 35 percent tax rate thereafter. Without action before year's end, 2013 tax rates will roll back to a $1 million exemption for individuals and a 55 percent tax rate on lifetime estate transfers above the exemption.
Many of our farms cannot take that financial hit. For our average reader with 200 cows, 150 replacements and 500 acres, the family dairy farm would be valued at $2.9 million, not including any buildings or machinery. This conservative estimate is based on values of $1,400 for cows, $1,000 for replacements and $5,000 per acre of land. Without federal action, that farm would owe $495,000 in taxes if owned by a married couple. To say the least, that is a slap in the face to our nation's hardworking farm families which are often land rich and cash poor.
The President has proposed a $3.5 million middle of the road individual exemption with a 45 percent estate tax rate thereafter. In our opinion, that's just a start. As land prices continue to escalate, Americans will need to decide if they want family or corporate farms. We fear that not extending the estate tax will eventually result in the latter.
This Hoard's Dairyman editorial appears on page 794 of the December 2012 issue.