We’ll likely be voting this November on an initiative to phase out Oregon’s Estate Tax. If the initiative passes, the “death tax” will be reduced each year until it is finally eliminated for persons dying after January 1, 2016. Most farm organizations strongly support repeal. This puzzles me since I believe a good argument can be made that the great majority of farmers risk paying more taxes. Instead of repealing the estate tax, we should be concentrating our efforts on raising Oregon’s estate tax exemption to the current federal level — $5.12 million for an individual and $10.24 million for a married couple.
According to a recent USDA study, 0.5% of all farms and 4.2% of “commercial” farms pay federal estate taxes. Most estates that include farmland are well under the exemptions and pay no tax. However, most farmers do benefit from the “stepped-up basis” provisions of the estate tax law. The “stepped-up basis” rule allows inherited property to be valued for tax purposes at its fair market value at the time of the death of the previous owner, i.e., its tax “basis” used in computing capital gains tax is increased to the “fair market” value at the time the assets were inherited.
Although few farmers plan to put their farms up for sale, the “stepped-up basis” still reduces taxes. Children and grandchildren often inherit parts of the farm after they have moved away and lost interest in farming. Family members who continue to farm usually end up buying out these non-farm heirs. The capital gains tax paid on sales within families is much reduced by the “stepped-up basis.”
The “stepped-up basis” is easy to justify for estates that pay estate tax. The estate tax is calculated based on the fair market value of assets at death. Without the “stepped up basis,” capital gains taxes on subsequent sales would amount to a double tax on part of the asset’s value (the difference between fair market value at death and the price originally paid by the decedent).
If the estate tax is eliminated and the stepped-up basis continued, wealthy taxpayers who are able to hold assets until death would avoid all capital gains taxation. This seems unfair to many and may explain why the “stepped-up basis” was eliminated when the federal estate tax briefly expired in 2010.
I’ve probably already lost you in this maze of tax law. To summarize, if the exemption is raised to $5 million, few farmers will be subject to the estate tax. Totally eliminating the estate tax risks losing the “stepped-up basis”—which benefits most farmers.