Copyright 2000 The Omaha World-Herald Company
Omaha
World-Herald
August 13, 2000, Sunday SUNRISE EDITION
SECTION: BUSINESS; Pg. 1M;
LENGTH: 1326 words
HEADLINE:
Estate Tax Clouds Future for Many
BYLINE: JOHN TAYLOR
SOURCE: WORLD-HERALD STAFF WRITER
BODY:
For Nebraska farmers like John McFadden, the
recently passed House and Senate bills to end the federal estate tax could be a
bittersweet victory, one that would help him financially but would come much too
late to recover what the tax already has claimed. Twice - once when McFadden's
grandfather Ray died in 1971 and again on the death of his father, Russell, six
years ago - the McFadden estate was subject to the federal tax, a levy placed on
the assets of estates handed down to heirs. In both instances, taxes were so
high that the family was forced to sell off nearly all of the estate to pay the
government. "In two generations the estate taxes and attorneys' fees have just
about taken everything," said McFadden, who now farms and ranches on 9,000
acres, much of which he rents, near Taylor, Neb. McFadden blames what he called
"very poor estate planning" for the demise of most of his grandfather's original
13,000-acre holdings, and he vows not to let it happen to him. "I got myself
incorporated, I'm doing gifting, and we have trusts set up," he said. "We're
spending thousands of dollars a year for insurance so we can pass down what we
have to our heirs. I don't want my children to be like I was when Granddad died
on the family ranch." For many owners of farms and other family businesses,
that's the choice: Either spend countless hours and dollars to reduce the tax
burden on your estate or risk having your heirs hit with a big tax bill at a
time when cash may be scarce. If the House and Senate can agree on a version of
the estate-tax repeal - and if the legislation survives a
threatened presidential veto - people like McFadden will be able to focus their
efforts and resources on other issues. In the meantime, thousands of farms and
small family businesses operate under the specter of a tax that often ruins an
enterprise when it is passed to the next generation. The federal estate tax,
paid by about 48,000 estates in 1998, has existed since 1916, when it was
created in part to help the nation prepare for war. Another rationale was that
it helped redistribute large concentrations of wealth. Opponents have assailed
it for years, calling it a "death tax" that penalizes people for their hard work
and kills businesses and jobs when heirs don't have the cash to pay their tax
bill. In past years, the debate was drawn along partisan lines: Republicans
favored repeal, saying the tax had outlived its usefulness; Democrats supported
the tax, saying the $ 28 billion in annual revenue was needed and that it
affected only the wealthiest Americans. Congress voted last year to repeal the
tax, but the president vetoed it. President Clinton has promised to take the
same action this year, although a number of Democrats have joined Republicans in
passing the latest legislation. Recent polls indicated a majority of those
people questioned want the tax repealed, a shift in public opinion from past
years. Some of the change in the public's attitude is attributed to the robust
economy, which has helped a growing number of people amass estates that would be
taxed under existing laws. And the newly wealthy have lent their voices to
traditional anti-tax lobbying forces, such as the National Federation of
Independent Businesses. Currently, the tax is levied on estates with a value of
$ 675,000 or more (rising to $ 1 million by 2006), with rates ranging from 37
percent to 55 percent. For family businesses and small farms, the tax doesn't
kick in until the estate reaches a value of $ 1.3 million. Most Americans - some
estimates say up to 98 percent - don't have to worry about the estate taxes. But
for small businesses and farms that have seen inflation boost the value of their
assets, the estate tax is a constant worry. To protect themselves, the owners of
land and businesses have had to call on lawyers and accountants to draw up
estate plans and to buy insurance policies. For Kenneth and Phyllis Gardner, who
farm near Max, Neb., all of this has been expensive and time-consuming. "My big
complaint is that they make us go through all of these hoops to keep something
that we've already paid taxes on," Phyllis Gardner said. "In order to do all the
things to keep what we think is really ours, we've had to spend a lot of money
along the way." The Gardners raise corn, wheat and alfalfa, as well as cattle,
on 7,000 acres and want to pass their operation on to Justin McGrath, a grandson
who is the only member of the family who has expressed interest in remaining in
the business. The land, in the southwest corner of the state, has been in the
family 113 years. Phyllis Gardner estimated that it has cost more than $ 20,000
to plan for the eventual transfer of property so it stays in the family. "That's
not counting the life insurance that we're now trying to keep going so we won't
have a problem," she said. "By dividing (the land) out and doing the things that
our accountants and lawyers told us to do, we are not going to have to pay
federal tax, but we've spent a lot of money to get to there." Estate planner Jan
Krotter-Chvala, an O'Neill, Neb., lawyer, said people who have been in farming
or business for years typically have been savvy enough to seek help in
protecting their assets against estate taxes. It's the newer businesses that may
run into problems, she said. "What you see out here in the farm and ranch
business and small business is a lot of first-time wealth," she said. "Most
people have never experienced a death or any type or estate tax audit or review
because their estates haven't been large enough. So you can't prompt people to
(plan) where they've never been through it before." Krotter-Chvala sees the
estate tax dilemma from both sides - as an estate planner and as a member of a
family that owns the Wm. Krotter Co., an O'Neill business started in 1891. The
company has a car dealership, sells hardware and lumber and recently got into
the manufactured home business. The death of a great aunt in the early 1980s
served as a wake-up call to the family, which had to pay some taxes on her
estate. "That prompted (the family) to make sure it didn't happen again,"
Krotter-Chvala said. "They've been pretty alert to what the tax laws are."
That's important if families don't want to end up having to sell a business to
pay the taxes. "The way we view the business is that it isn't an asset that
anybody's going to cash in," she said. "It's a lifestyle, a way to raise your
family and teach them how to work, and to support the community you live in." A
sense of community looms large in the estate-planning thinking of David
Pankonin, owner of Pankonin's Inc., a Louisville, Neb., farm equipment
dealership. "This business has 16 employees, so other people have a stake (in
keeping the business alive)," he said. "My customers have a stake. If this
business doesn't exist, I'm not sure that another one would take its place to
serve them." Over the years, Pankonin, the fourth generation to head his
family's 117-year-old company, has taken the usual steps to prepare for the
transfer of the business to his heirs - setting up trusts, buying life
insurance. Pankonin said he doesn't favor complete repeal of the estate tax; he
would prefer to see the exemptions raised. "I think the problem has been that
the exemption has stayed the same," he said. "It wasn't indexed to inflation.
I've seen some of these statistics where only 1 or 2 percent of the farms would
be affected (by the estate tax). In my area, I think it's more than that. My
hunch would be that 40 percent of my farmer customers could easily be affected."
For business owners, estate planning diverts money that otherwise could be
reinvested. "You're talking about small businesses and farms that aren't that
super profitable," Pankonin said. "You're spending a lot of time and money on
efforts not to beat it, but to comply with the law, and still keep the business
going."
GRAPHIC: B&W Photo/1 IN THE FAMILY: David
Pankonin, owner of a Louisville, Neb., farm equipment dealership, is the fourth
generation to head his family's 117-year-old company. "This business has 16
employees, so other people have a stake (in keeping the business alive), he
said.; Nobuko Oyabu/World-Herald/1
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14, 2000