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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

LOAD-DATE: August 14, 2000




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