The Federal estate tax has applied to the transfer of property
at death since 1916, as part of a unified system of transfer
taxes. While the tax has been amended many times, the estate
tax, as well as the gift tax (imposed upon transfers prior to a
person's death) and generation-skipping transfer tax have never
directly affected a large percentage of taxpayers. Under the
current Federal estate tax system, individuals can transfer up to a
specified amount in money and other property without incurring
Federal estate tax liability. When property is transferred at
death, it is generally the responsibility of the estate to pay any
taxes due as a result of the transfer unless other arrangements for
payment are made. Under present law, the estate of a decedent
who, at death, owns assets in excess of the estate tax exemption
amount ($5 million in 2011) must file a Federal estate tax return.
However, only those returns that have a taxable estate above the
exempt amount after deductions for expenses, debts, and bequests to
a surviving spouse or charity are subject to tax at a graduated
rate, up to a current maximum of 35 percent (see table).
Over the years, a number of targeted provisions have been
enacted to reduce the burden of the estate tax on farms and small
business owners. These include a special provision that allows farm
real estate to be valued at farm-use value rather than at its
fair-market value, an installment payment provision, and a special
deduction for family-owned business interests. A provision aimed at
encouraging farmers and other landowners to donate an easement or
other restriction on development has provided additional estate tax
savings. These provisions have reduced the potential impact of
estate taxes on the transfer of a farm or other small business to
the next generation (see Special Provisions Benefit Farmers, in the
June 2009 issue of Amber Waves).
Economic Growth and Taxpayer Relief Reconciliation Act of
2001
Providing tax relief to farmers and other small business owners
was a primary impetus for the Economic Growth and Taxpayer Relief
Reconciliation Act of 2001 (the 2001 Act). The 2001 Act reduced
Federal estate and gift tax rates and substantially increased the
amount of property that can be transferred to the next generation
free of Federal estate tax, culminating in the tax's complete
repeal in 2010 (persons dying in 2010 owe no estate tax under the
2001 Act).
In addition to repealing the estate tax, the 2001 Act changed
the treatment of unrealized gains at death, effective with estate
tax repeal in 2010. Prior to 2010, the basis (which is the value
used to determine gain or loss) of assets acquired from a decedent
was stepped up to the estate's fair market value at the date of
death. This "step-up in basis rule" essentially eliminated the
recognition of income on the appreciation of the property that
occurred prior to the property owner's death. Upon repeal of
the estate tax in 2010, however, the step-up in basis rule was
replaced with a modified carryover of the decedent's basis with an
added amount of up to $1.3 million (plus an additional $3 million
for transfers to a surviving spouse). This change added to the
compliance burden since it was necessary to determine the cost or
other basis of inherited assets. In farming, these assets may have
been held for several decades with limited documentation on their
original cost or the method in which they were acquired.
Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (the 2010 Act), signed by the president in
December 2010, extends and augments the expiring provisions of the
2001 Act. Instead of allowing for the full repeal as planned
in 2010, the law retroactively sets a new tax exemption amount at
$5,000,000 for an individual, and a maximum estate and gift tax
rate of 35%, effective for 2010. The 2010 Act also reinstates the
step-up in basis rule, and while most estates will owe fewer taxes
under the $5 million ($10 million for married couples) and
stepped-up basis provisions, some very large estates would owe less
tax under the repeal and carryover basis provisions that applied
under the original 2001 legislation. For deaths occurring in 2010,
the new law provides an election to be treated under the 2001 law
in which the estate tax was repealed but the modified carryover
basis rules applied.
| Present law estate tax exemption amount and
tax rates, 2000-2013 |
| Year |
Estate tax exemption amount
|
Highest marginal estate and gift tax rate
|
| |
Dollars |
Percent |
| 2000 |
675,000 |
55 |
| 2001 |
675,000 |
55 |
| 2002 |
1,000,000 |
50 |
| 2003 |
1,000,000 |
49 |
| 2004 |
1,500,000 |
48 |
| 2005 |
1,500,000 |
47 |
| 2006 |
2,000,000 |
46 |
| 2007 |
2,000,000 |
45 |
| 2008 |
2,000,000 |
45 |
| 2009 |
3,500,000 |
45 |
| 2010 |
5,000,000 |
35 |
| 2011 |
5,000,000 |
35 |
| 2012 1/ |
5,000,000 |
35 |
| 2013 2/ |
1,000,000 |
55 |
|
1/ The $5,000,000 exemption amount will be indexed for inflation
beginning in 2012.
2/ In 2013, exemption amounts and estate tax rates revert to law
prior to the 2001 Act.
Source: Internal Revenue Code Section 2010.
|
In addition to a new exclusion amount and tax rate, the 2010 Act
adds an important provision that will be beneficial to some farm
businesses and households. The new law allows any unused exemption
amount of a decedent's estate to be transferred to a surviving
spouse. Under this portability rule, if a spouse dies after
December 31, 2010, the survivor is granted the ability to use any
unused exclusion amounts provided that a timely election is made on
the filed estate tax return of the decedent. In practice, this
means that a married couple will have a combined exclusion of $10
million, even if the first spouse to die does not fully utilize
their $5 million exemption amount. The new provisions are in effect
through December 31, 2012.
Since the passage of the 2001 legislation, the amount exempted
from the estate tax has gradually increased from $675,000 in 2001
to $5 million in 2010. The median wealth of farm households is
about five times that of all U.S. households. As a result, farm
estates are more likely to owe Federal estate taxes than the
typical estate.
Based on simulations using farm-level survey data from ERS' 2009
Agricultural Resource Management Survey (ARMS), about 1.2 percent
of the 41,688 individual farm estates projected for 2011 are
estimated to have assets in excess of $5 million and would be
required to file an estate tax return. After deductions, less than
half of these farm estates are likely to owe tax. These taxable
farm estates have an average net worth of $10 million--including
non-farm wealth--with the average taxable estate owing about $1.3
million.
The impact of the Federal estate tax varies by farm type. ERS
classifies farms as rural residence farms (retirement and
residential/lifestyle farms), intermediate family farms (annual
sales less than $250,000 and primary occupation is farming), and
commercial farms (annual sales greater than $250,000). Based on the
2009 ARMS data, the average value of farm assets for commercial
farms was roughly $2.8 million. Thus, despite estate tax relief
targeted to farmland (see Special-Use Valuation in the June 2009 issue
of Amber Waves), an estimated 4.2 percent of the estimated
2,309 commercial farm estates are likely to owe Federal estate
taxes in 2011. Commercial farms are 14 times more likely to owe
Federal estate taxes than other farms.
Farm property also plays a role in the estate tax position of
decedents who might not be farmers, but nonetheless own farm
property. According to Internal Revenue Service (IRS) data for
2009, one out of every eight taxable estates had some farm
property. While we estimate there were 359 taxable farm estates in
2009, the IRS reports 1,846 taxable estates with farm property. The
average amount of farm property was $1.796 million. However,
on average these farms had more nonfarm than farm assets.
Present Law Provides Uncertainty
Under the 2010 Act, after December 31, 2012 the Federal estate
tax will revert to the pre-2001 law. As a result, the exempt amount
would return to $1 million and the top tax rate would revert to 55
percent. The reversion to pre-2001 law, if it occurs, will
substantially increase the share of estates that owe Federal estate
tax and will result in significantly higher Federal estate tax
revenues.
Since 2000, farm equity has more than doubled, primarily due to
the increased value of farm real estate. As a result, if the estate
tax reverts to pre-2001 law, it is estimated that as many as 1 of
every 10 farm estates would owe estate tax in 2013. Total payment
amounts that year could increase to about $3.1 billion--nearly 10
times the estimated amount owed by farm estates in 2011.