Sun misses the point on estate taxes for farms

January 24, 2012

Your Jan. 17 editorial, "Death and farming," misses much of the big picture. If few farm families are taking advantage of a pilot tax program, perhaps it is not because tax relief is not needed. Rather, it may indicate that in many cases the mere deferment (for seven years) of the state's part of a crushing state and federal estate tax burden is of insufficient help to the cash-poor heirs of family farms.

A big picture should include that Maryland's estate tax rate of approximately 16 percent is much higher than that of most states (and many states have no inheritance tax), and should ask the basic question of why should the state's inheritance tax rate be so much higher than the state's income tax rates? In other words, why should the family have to pay a higher tax rate to inherit the family farm than would the winner of a lottery?

The same inequity appears in the federal estate taxes which have had rates of more than 50 percent for most of the past three decades. The federal rate has dropped to 35 percent, for 2011 and 2012 only, but the Obama administration is proposing to raise the rates again to 45 percent for 2013 and beyond.

The big picture should also include an examination of the practices by the state and the federal government of assessing estates at "their highest and best use." This has a uniquely harmful impact on farm estates, since the value of the property is effectively determined by its value if it were sub-divided or sold to a developer, not as farmland. Though the family may want to keep the property in the family and as a farm, they are required to come up with an estate tax sum based on its "highest and best use" value.

A far better system would be to offer the option of valuing the farm as a farm in the estate. This might reduce its value to the point where all or most of the estate is covered under the estate tax exclusions. In addition, this would also reduce the cost basis of the property going forward. Thus, if the property is sold later for one of the "highest and best use" purposes, much larger capital gain taxes would then be collected. So rather than force a family to sell all or part of the farm just to pay inheritance taxes based on an unexercised, "highest use" value, there would now be a significant tax disincentive for later exercising that option.

The option of valuing a farm as a farm instead of its "highest and best use" would also address a fundamental fairness (and constitutionality) issue regarding land use regulations like PlanMaryland. How can the state first require heirs to pay estate taxes based on a "highest use" value, one that the state requires to be assigned at the time, and then reduce the highest use value, without any compensation, through later regulatory changes?

Lee Magness, Bel Air.

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