'Death tax' looms over farms, small businesses

While Scott Bradley is optimistic about the future of Bradley's Better Beef, he is worried about an issue common to both farmers and small businesses the estate tax.

"Nothing can be worse than having to sell off land that your parents or grandparents worked so hard to earn," said Bradley, who raises cattle on 398 acres just 3.2 miles southeast of Ozark. Most of the land is in his mother's name.

Lisa McKay, an attorney specializing in estate planning, said the estate tax aka death tax is limited to larger inheritances. However, because of rising land values, some landowners may have issues they're not yet aware of.

"The tax doesn't apply until the estate exceeds $1 million. And it's set to go up to $1.5 million" on Jan. 1, 2004, McKay said.

"Let's assume we have a farm out here. The farmer paid $200,000 for it. It's now worth $1 million. The only property in the estate is that farm. The children could inherit it at the value of $1 million, sell it the next day, pay no estate tax and no capital gains tax. So all of these smaller estates, people pay no estate tax and no capital gains tax on the inherited items.

"For the estates that exceed the $1 million, the tax rate starts at 43 percent. But, again, there is no capital gains tax. For the smaller estates, it's great. For the larger estates, it's not so great."

Recent surges in growth in the area, especially in Christian County, have caused land values to skyrocket, putting Bradley and others farmers in the IRS' sights.

One 400-acre estate southeast of Ozark recently sold for $2.2 million, according to data from the Greater Springfield Board of Realtors Multiple Listing Service.

"If land owners don't plan well in advance of their own death, their heirs are going to have to pay large amounts in death taxes and a lot of times the only way they can do that is by selling part of the farm," Bradley said.

McKay said there are ways to either eliminate or reduce the estate tax.

"They can set up two separate trusts. Each parent then qualifies for that $1 million. So effectively, a husband and wife can transfer $2 million in assets estate-tax free," McKay said. "They each set up their own trust. They each get the $1 million credit.

"By keeping everything joint husband and wife, there's no tax on the first death. It all passes over to the surviving spouse. But it's upon the second spouse's death that they have an estate tax, and they only have one credit if everything was registered husband and wife."

After the first spouse dies, that half of the estate stays in trust for the benefit of the other spouse, with the surviving spouse as the trustee of the deceased spouse's trust, McKay said. Then after the death of the second spouse, the estate would be disbursed per the terms of the trusts.

McKay said that many people believe putting one of their children's names on it will avoid the estate tax.

"Joint ownership doesn't avoid the estate tax. That just keeps it out of the probate court," McKay said. "That's also risky for a parent to do that because that subjects that asset to the claims of the creditors of the child."

If a family is required to pay an estate tax, it has 15 years to pay the tax if it's a qualified family farm or a small business.

"Basically, the first four years they pay interest only, and then after that it's interest and principle," McKay said. "The IRS takes back a lien, and if they sell that farm during that period of time they pay a prorata portion of the taxes."