When farm owner dies, new estate law should help families keep it in business

By Dana Amihere
Dana@MarylandReporter.com

Farmers who want to keep the family farm in the family and in business when the owner dies hope that a law signed last week will do just that for agricultural homesteads in Maryland.

The Family Farm Preservation Act signed by Gov. Martin O’Malley aims to protect the future of the family farming by substantially reducing death taxes on many smaller operations.

The new law, which takes effect in July, raises the estate tax exemption from $1 million to $5 million on agriculture-related assets so long as the farm remains in agricultural use for 10 years following the owner’s death. The previous base exemption made it difficult to for farmers to pass their farm on to the next generation following an owner’s death.

The Mid-Atlantic region’s high land prices coupled with a modest-sized farm’s machinery, livestock and buildings on the farm like a barn or farmhouse quickly adds up to $1 million or more in assets.

Average farm worth $1.8 million

Fish and wildlife statisticians Southwick Associates estimate, “The Delmarva Peninsula has nearly 7,000 farms, of which nearly 5,500 are individual or  family farms. The average value of the land and buildings on each of those farms is $1.8 million.”

“The estates of small business owners are about twice as likely as the typical estate to owe tax, and farm estates are even more likely to owe tax, primarily because of their land holdings,” according to the U.S. Agriculture Department’s economic research service. In addition, “The median wealth of farm households is about five times that of all U.S. households.”

Nevertheless, “Most farms are land and equipment rich but cash poor,” said Valerie Connelly, government relations director with the Maryland Farmer’s Bureau.

“In order for farms to be passed on from one generation to the next they’re finding that they have to sell off land or equipment or livestock in order to raise the cash needed to pay the estate tax bill,” Connelly said.

Keeping it in the family

Brad Miller of Miller Farms in Clinton, Md., whose family’s 267-acre farm has been in operation since 1840, thinks the new legislation addresses a problem that could become increasingly more common.

“We’re at a point where the average farmer is in their 60s or 70s,” Miller said. The older generation generally passes down their land as an inheritance to avoid the estate tax, but more farmers’ kids are going off to college or work and not coming back.

Long hours seven days a week, no pension plan and no air conditioning, Miller said, “It’s not the payoff we’re looking for, just to keep a job. To pay more to keep it doesn’t make sense. It’s punishing people that are trying to keep America moving.”

A decade of debate

Since 2003, there has been a disparity between the federal and Maryland’s estate tax exemption. According to the USDA, the farm estate tax has steadily increased in this time, with a short-lived repeal in 2010 and return to $1 million in 2011.

Though the federal tax exemption base is lower, the tax rate is significantly higher at 55%. The farm bill reduces the state’s tax rate from 16% to 5%

Connelly says that the Bureau’s efforts to reform estate tax legislation have amped up over the past 10 years, reaching out to legislators from both sides of the aisle. High-ranking Democrats and Republicans from rural areas, including Del. Norman Conway, D-Wicomico, Del Susan Krebs, R-Carroll, and Sen. Thomas Mac Middleton, D-Charles.

But, says Connelly, “We were lucky to have the governor on board.”

The Bureau’s board of directors met with O’Malley to tell him that estate planning was the No. 1 issue that farmers want addressed.

Freshman Del. Kathy Afzali, with lots of farms in her Frederick County district, took on the issue last year, asking O’Malley at the annual agriculture dinner to support the tax change.

“This issue has been my passion since my original campaign in 2010,” Afazali said. “Although the governor and I don’t always agree, I believe he has shown great leadership in this regard and I congratulate him on helping champion the issue.”

The farm preservation bill was an official part of O’Malley legislative priorities but was passed by the General Assembly just two days before the regular session ended.

Connelly said, “We’re very pleased with the bill that was passed and enacted into law. The way it’s written is going to be the most beneficial to farmers looking to pass their farms on to the next generation.”

The state is only expected to lose about $2.5 million in revenue each year, the Department of Legislative Services estimates. “In fiscal 2010, the Maryland estate tax burden was the seventh highest in the nation,” the fiscal note said.

Virginia and West Virginia do not impose any taxes on wealth transfers while tax burdens in Pennsylvania, New Jersey, and the District of Columbia are among the highest in the nation.