Estate Taxes Have Little Effect On Family Farms

About a week ago at a business event I heard someone make the claim that estate heirs must often sell a family-owned farm to pay the estate taxes owed after the primary owner dies.  I wondered about the facts behind this claim.  Let's go get those facts.  

The Congressional Budget Office study titled "Effects of the Federal Estate Tax on Farms and Small Businesses" (published July 1, 2005) determined that only a small percentage of estates with family farms have liquid assets insufficient to pay estate taxes.  Estates can value farms at a lower "current use" valuation provided they remain in operation for another 15 years.  Many family farms do not even meet the minimum valuation threshold that would subject them to estate taxes.  These qualifications exist to protect small family farms from liquidation if estate taxes place them in jeopardy.  

The Land Trust Alliance has done leading-edge work on tax matters affecting farmland.  Families can use land trusts to shelter portions of inherited land from estate taxes.  There are plenty of legal ways to pass farms intergenerationally through estates without getting people all worked up with scare stories about liquidation to pay taxes.  Check out IRS rules on small businesses and estate taxes for more details.  

Remember that estates are considered as a whole and farmland is just one asset of your dead relative's wealth.  Stop listening to baloney stories from scare-mongers who want to prompt you into unnecessary action.  Don't let some slick sales jerk frighten Grandma or Grandpa into an early grave with a hard sell on some scam transaction.  Throw that jerk off your farm.  

Retirement Account Cap Will Limit Ability to Hedge Hyperinflation

The Administration's coming budget plan will cap the value of tax-advantaged retirement accounts at $3M.  It's too early to tell how the federal government will enforce this cap without seeing the enabling legislation.   I would have no objection if any excess value in a retirement account after the beneficiary's demise were subject to full taxation as part of an estate.  If the intent is to prevent retirement accounts from being abused as multigenerational tax shelters, this will prevent them from being passed to heirs in a tax-free status.  This idea has more immediate implications for investors than estate taxes.

My readers know that I expect a dollar devaluation and policy overreactions to launch hyperinflation in the U.S. at some point.  A tax-advantaged investment account would in theory allow the preservation of wealth during hyperinflation if its asset mix was heavily weighted toward hard assets.  Any cap on the account's value poses a complication.  If the cap is enforced only when distributions stop at death, it's not much of a concern.  If, however, the cap is enforced annually via a special tax, then the nominal value of the account will not rise above $3M in any given year.  This will pose a huge problem for investors positioning a portfolio for hyperinflation, because the real value of a hyperinflating currency will decline to the point where a nominal value of $3M is meaningless.

This proposed cap will pose a serious dilemma for investors who want to preserve their net worth during and after a currency crisis.  Holding an IRA that is forced to remain below a $3M ceiling will prove disastrous in a hyperinflated economy where a cheeseburger costs $3M.  Investors must now wargame scenarios that include the liquidation of an IRA as it approaches the $3M limit, the payment of a penalty, and the deposit of the remainder into a taxable portfolio (presumably also with a heavy hard asset weight) that so far is not subject to the same ceiling.  The point of such a mitigating move is to allow a hard asset portfolio to continue to keep pace with hyperinflation.

Caps and taxes on private retirement assets are a form of financial repression that keep redistributive entitlement programs fully funded.  Lazy people who did not save for the future think it's fair to take money via taxes from those who did save according to a plan.  This idea will make it much harder for makers and savers to keep their capital away from takers.

"Strong" Estate Tax Targets Middle Class And Ignores Super-Rich

Warren Buffett wants a strong estate tax.  This has a populist, common sense appeal in light of his advocacy for higher income taxes and generous charitable giving pledge.  Uncle Warren's argument is that plutocratic-enabling tax policies harm democracy.  Let's consider the circumstances of today's plutocracy to determine whether any changes in tax policy will really weaken their hold on power.

The estate tax plan from United for a Fair Economy, which Mr. Buffett has endorsed, reduces the estate tax exemption threshold from $10M to $4M.  This will harm the middle class and those who try to raise their status into the upper middle class more than it will harm billionaires.  The ultra-rich who signed up for Mr. Buffett's big giving pledge have already structured their estates to pass into tax-free foundations and giving vehicles they control through trust agreements.  George Lucas' designation of the proceeds from Lucasfilm's sale to a charity he favors is a classic example of how the ultra-rich can always avoid estate taxes.  Giving your own money to a non-profit you control is a legal way to continue paying your living expenses.  The aspirational middle class may not have access to the same kinds of estate-preservation strategies unless they can afford very competent wealth managers and tax attorneys.  This is why the proposed policy's endorsement of a strong graduated tax on larger estates is meaningless.

True estate tax reform would begin with the elimination of the tax deductibility of charitable contributions.  That won't happen, of course.  Non-profit executives who derive their funding from endowed foundations would lobby against it and so would wealthy donors who fund political campaigns.

I'll give you a plan for real, comprehensive tax reform.  Have the U.S. Treasury study the history of tax collection in the U.S. and identify the point on the Laffer Curve that maximizes gross revenue.  I suspect it's somewhere between 16% and 19%, which means Warren Buffett probably isn't undertaxed at all if he pays 17.4%.  Once we've identified that optimal point, make that the flat tax rate for all income with no deductions, exemptions, or carry-overs for any reason.  Taxing earned income, unearned income, capital gains, and estates at that one rate will enormously simplify the government's operations.  It will also render redundant the hordes of accountants and attorneys who perform little productive work.  Tax planners represent as much of an overhead burden for the economy as tax collectors.  I know the federal government will never adopt my plan because I can't bundle as many campaign contributions as Warren Buffett.