Have you ever heard the “widows and orphans plea?”
A century ago, whenever some titan of industry was challenged for mistreating employees or engaging in questionable practices, he often responded that he personally would like to behave in a kinder, gentler fashion. However, he would say, his fiduciary responsibilities to the poor widows and orphans who owned stock in his company and depended on already shrunken dividends to buy a few crusts of bread compelled him to seek higher profits by any means.
Most people disregarded the classic “widows and orphans” defense as self-serving rhetoric. But it was no more self-serving than current references to farmers and small-business owners made by opponents of the federal estate tax. We will make a better decision on this issue if we get beyond such facile, misleading rhetoric.
Here are some wild assertions I have heard in the past few weeks and my responses:
Estate taxes are a major concern for most farms and small businesses.
More than 2 million adults die each year. About 1.5 to 1.8 percent of these deaths result in an estate tax filing. Of the 30,000 to 40,000 total such filings each year, some 4,000 or 5,000 estates include either a farm or small business. The rest consist of financial assets, in many cases ones inherited from a preceding generation.
“Estate taxes are so high that people frequently sell farms or businesses to avoid paying them.”
This verbatim quote from a radio commentator is a real howler. Estate taxes are calculated on net worth, regardless of what form it is in. If an estate is large enough to be subject to the tax, it doesn’t matter if it consists of a farm, U.S. Treasury bonds or Beanie Babies.
Estate taxes total so much that heirs must liquidate farms or small businesses to produce the required cash.
Speaker Dennis Hastert avowed on the floor of the House that this kept him out of farming. If so, it would be a surprise to Iowa State economics professor Neil Harl, the national expert whose classic, Farm Estate and Business Planning, is the standard reference on the subject. Harl has stated repeatedly that he has never encountered a case where this has actually happened.
Other farm management researchers acknowledge that heirs of an extremely large farm might have to borrow funds to pay estate taxes, but obtaining such a loan would be easy since the any tax would be low compared to the equity in the farm operation.
What happens more often is that one or two of several heirs does not want to remain a partner in the farming operation, and it is liquidated to provide cash for the siblings who want out.
Farmers and small-business owners spend inordinate amounts on legal services to avoid paying estate taxes.
Most farmers and business owners do seek advice from attorneys and accountants on estate planning. But the usual objectives are to transfer ownership from one generation to the next and to structure some fair treatment for both those children who are continuing in the family business and those who do not.
An increasingly common secondary objective is to transfer assets to offspring in a timely manner so that no money is left to pay nursing home expenses for the retiring parents. Estate tax considerations come in a distant third, and common arrangements to accomplish the first two goals usually take care of this one for good measure.
“I have to give away so much money to avoid estate taxes that the government will have to pay the bill when I end up in a nursing home.”
Another direct quote, this assertion was made by an elderly woman calling in to a talk show. She is sadly misinformed. Yes, many aging people give gifts of up to $10,000 per year to children or grandchildren knowing that these small amounts are not subject to estate or gift taxes.
They do so primarily to transfer ownership of a going operation to succeeding generations and to avoid nursing home liens. But one can keep $675,000 free of estate taxes. At moderate rates of interest, that will fund an annuity producing $5,000 per month for 25 years. No one in this situation is forced to become a public expense.
There are good arguments for and against the estate tax on the grounds of economic efficiency and/or fairness. I favor keeping it. Some friends I respect favor abolishing it. Let us have a good public debate about the pros and cons, but please, do not invoke the “farmers and small business” argument. It is a fallacy.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.