Future of Estate Tax Up in Heir

When Eldon Reed died on July 22, the 79-year-old man left his son 1,000 acres of farmland in Lee County and nearly $600,000 in cash.

“It will take all the cash that he had to pay the estate taxes,” said Stanley Reed of Marianna. “It’s just to me very unfair to make death a taxable event.”

Reed, 54 and president of the Arkansas Farm Bureau, has long pushed for the permanent repeal of the controversial state tax.

The issue was expected to be voted on in Congress before its August recess, but now it looks like a vote won’t happen until next year.

“This battle is going to get hotter,” said Dick Patten, executive director of the American Family Business Institute in Washington, D.C. His group, which has 90 members in Arkansas and 950 nationwide, has raised and spent $6 million in efforts to repeal the estate tax.

Other groups are fighting just as hard to keep the tax in place, saying the tax doesn’t affect many Americans directly but its repeal would slash charitable giving by the wealthy.

Even Democratic U.S. Sens. Blanche Lincoln and Mark Pryor are divided. Pryor opposes the repeal, while Lincoln is for it.

In a prepared statement, Pryor said, “I do, however, fully support raising the estate tax exemption high enough to protect our producers and small businesses from being harmed.”

Lincoln said she has always supported a full repeal of the estate tax, which opponents prefer to call a “death tax.”

“I think our principles here in this country are that we want to encourage individual families and others to work hard,” she said. “And when you work hard all your life, the dream is that you would be able to pass on that baton and that dream to your children.”

As it stands now, the best time for a wealthy American to die will be 2010. That’s the only year when it is certain there won’t be a federal estate tax.

The situation also makes extra work for Stan Miller, a Little Rock lawyer who is an estate planner.

“Nothing is going to happen [to the proposed repeal], which leaves us in total limbo having to explain a real tortured system to clients,” Miller said. “[Clients have to] plan for a credit that’s $1.5 million today, $2 million in January, $3.5 million in January 2009, and no tax in 2010 and a credit of $1 million 2011. So we’re having to draft documents that take all of that in account, too.”

Miller said it’s confusing for clients because “the ground rules … are so wildly varied depending on what year you happen to die.”

The Status

In late summer, Congress was expected to take up the estate tax matter, by either repealing it or changing the exemption to somewhere between $3 million and $5 million.

But with hurricanes Katrina and Rita and the Supreme Court vacancies, those conversations came to a halt.

It appears talks in Congress will resume sometime next year.

“There seems to be some momentum away from a repeal in its entirety given the budget constraints,” said Shari Levitan, chair of New England private wealth services for law firm Holland & Knight LLP of New York, one of the largest estate planning practices in the country.

The estate tax doesn’t impact that many people anyway, according to United for a Fair Economy, a Boston group that supports keeping the estate tax in place.

Fewer than 1 percent of people who die are subject to an estate tax. And only three of every 10,000 people who die leave a taxable estate in which a family business or farm forms the majority of the estate. The organization also said the average small business is worth about $700,000, well below the level at which estate taxes are applicable.

“Virtually all small family businesses can be protected by simply raising estate tax exemption levels,” UFFE said.

Farmers

Reed, who is also on the American Farm Bureau board of directors, said a number of family farms have been hurt by the estate tax.

He said his father’s estate is worth between $2 million and $3 million, but most of that value is tied up in land.

“The money that you’ve taken to buy these assets, to buy the land, that money has already been taxed once,” Reed said. “And when you die, it’s taxed again … There are just more equable ways in taxing wealth than having to tax twice and sometimes three times.”

Reed said he and his father had bought the land together over the past 30 years and had planted cotton, rice and soybeans there.

Reed, who left his law practice to work with his father on the farm years ago, hasn’t figured out what he owes for estate taxes yet, but it could be more than $600,000.

“[My dad] saved and scraped until the time he died to be able to have enough to pay the estate tax,” Reed said. “He was fortunate enough to pass [the farm] on.”

Levitan said some people think the estate tax is double taxation because someone had already paid income tax to acquire the wealth.

“The nature of the tax is different,” she said. “For some people, it’s an extra bite that they either need to plan around or figure out how to pay for … Whether it’s a fair place to take that bite to make a [workable federal] budget I think depends on your perspective.”

Lee Farris, senior organizer on estate tax policy for United for a Fair Economy, said the estate tax doesn’t make it hard for family farms or businesses to pass from one generation to the next.

“We’ve had the estate tax since the beginning of last century,” Farris said. “Businesses have been passed down [through generations].”

Now less than 1 percent of people who die owe an estate tax. And for the few that have to pay, they have the money to cover the cost of the tax, Farris said.

In 2003, 179 Arkansans paid the federal estate tax, raising $125.76 million, she said.

Nationwide, 30,627 paid the tax and generated $20.65 billion in revenue.

Lincoln said the numbers of the people who have to pay don’t tell the entire story.

“They are talking about those [people] that end up in the circumstances where [they] do have to pay,” she said. “They are not calculating into that those individuals who spend a tremendous amount of their resources in legal fees and accounting fees in order to avoid having to get to that situation.”

Patten, of the American Family Business Institute, said some business owners are spending $100,000-$300,000 a year in insurance and attorney and accountants’ fees to protect their estate from the tax. (The estate tax has been called “a tax on the uninformed.”)

If the tax is repealed, Lincoln said, small-business owners won’t have to spend the money to avoid the tax but can reinvest that money in their business and hire more workers. Taxes generated from more people working could replace the lost revenue from the repeal of the tax, she said.

Charitable Giving

Reed said his father, who grew up during the Great Depression, worked his whole life to accumulate a few assets.

“As soon as you start to gain a few assets, the only way to prevent them from taking it at death in taxes is just giving it away before you die,” Reed said.

And some use the same argument in favor of continuing the estate tax.

“The estate tax encourages charitable giving at death by providing a deduction for charitable bequests,” said William Gale, senior fellow at the Brookings Institution, in a statement to the Senate Finance Committee on Sept. 13. “Less obviously, it also encourages giving during life.”

Gale told the committee that donations not only reduce income taxes but they remove the assets from the estate, which avoids estate taxes as well.

He said research has shown the estate tax repeal would slash charitable giving by between 22 percent and 37 percent, or between $3.6 billion and $6 billion a year.

“None of these estimates take into account any possible change in the ‘culture’ of giving that might accompany outright repeal of the estate tax,” Gale said. “Repeal would convey an explicit message that charitable giving at death is no longer encouraged.”

Little Rock lawyer Miller, who is also a member of the International Association of Advisors in Philanthropy, said if the estate tax was wiped out, it would be devastating to charities.

“A gift to charity is motivated at least in part by the tax savings,” he said. “Usually people have some philanthropic motivation and the charitable benefit nudges them over the line.”

Miller said without the estate tax, charities would be left to rely on those devoted to giving to charities.

Patten said he didn’t think people would stop giving to charities if the estate tax was eliminated.

“By getting rid of the death tax families will have more to give to charities,” Patten said. “When the death tax is taking up to 55 percent of what they own, the first thing that gets cut back is philanthropy.”