America’s family forest owners – who own 59 percent of America’s forestland, including family farms – are bearing more responsibility than ever before for the nation’s environmental quality and sustainable timber production. Yet, the possibility of untimely timber harvests and disruption of established forest management programs due to federal death tax policy is becoming increasingly pervasive. This trend is counterproductive to society’s goals of sustainable forestry and environmental quality. Succinctly put, the Forest Landowners Tax Council position on the death tax is that it should be immediately and permanently eliminated.
Background: The modern-day federal death tax dates to 1924, when the top rate on estates worth more than $10 million was set at 45 percent. Congress increased death taxes over the next decade to a maximum rate of 77 percent. Subsequent revisions to the tax code included 1976 legislation (PL 94-55) that unified the gift and estate taxes into a single tax with a top rate of 70 percent for cumulative transfers of more than $5 million. The next major change to the estate tax came in 1981 (PL 97-34) when Congress reduced the maximum rate from 70 percent to 50 percent beginning in 1987. However, the latter was never actually implemented, and the maximum rate remained at 55 percent, until 2001.
In that year, under President George W. Bush, Congress gradually – in yearly increments – increased the amount exempted from the estate tax and reduced the top estate tax rates. As part of this law, the estate tax was repealed for the year 2010 only but was set to return to pre-2001 levels beginning in 2011. However, in December 2010, a tax-cut compromise was enacted that established estate tax rules for 2011 and 2012 that set the rate at 35 percent for estates valued at over $5 million. These rates and exemption levels sunset on December 31, 2012 to return to pre-2001 levels.
Pre-2001, the death tax generated approximately 1.5 percent of annual federal revenues. However, it affects persons of similar net worth in dramatically different ways. For example, an heir faced with a sizable death tax bill who has inherited fairly liquid assets such as stocks or bonds will find it much easier to pay the tax as compared to a person who inherits relatively illiquid assets such as forest property, the sale of which could eliminate a family’s heritage or result in a substantial environmental cost. Forest Landowners Tax Council, Inc.
The death tax provides a disincentive to the retention of family forestland and to continuing to sustainably manage the forests even if not sold. The federal death tax can also force an estate faced with a substantial tax bill to harvest timber in an environmentally insensitive way, disregard a long-term professional forest management plan, forfeit ownership, or parcel out portions of the property — thus breaking up ownership, fragmenting forested landscapes, and encouraging alternative development patterns that often have negative impacts on the environment and forest management. This problem may become even more widespread in the near future, as about half of today’s non-industrial private forest landowners are over the age of 60.
Nearly 11 million non-industrial private forest owners hold 59 percent of the nation’s commercial forestland base. These landowners hold their forests for a variety of reasons including, but not limited to, recreation, wildlife habitat, preservation, timber production, and investment. Most do not rely on their forest property as a primary income source but often receive periodic economic benefits from forestland ownership. These lands provide 49 percent of the nation’s timber supply and 53 percent of outdoor recreational opportunities.
Rationale: If the estate tax returns to pre-2001 standards, the federal death tax provisions will present a great burden to many individuals who inherit forestland. The tax would range from 37 to 55 percent of the taxable estate and is due nine months after the owner’s death. In response to this substantial tax and short payment schedule, many heirs are forced to disrupt forest management programs, prematurely harvest timber, and otherwise engage in unsustainable forest practices that can degrade the quality of both the environment and the land, thus limiting future forest management options. The tax may also force the estate to subdivide or sell all or portions of the family land that might otherwise be managed in a sustainable manner, in order to meet the death tax obligation. The conversion of forestland to other uses or the unsustainable harvest of its resources is of major concern to the American people and forest landowners.
The special use valuation provisions of the federal estate tax law are of little help to forest landowners. Although technically applicable to forestland and timber, they were written primarily to apply to agricultural production. The eligibility and valuation rules are largely incompatible with the reality of nonindustrial forest management and can only be used by timber estates with the greatest of difficulty. For example, specially valued timber cannot be harvested for 10 years after the owner’s death, even if required as part of an ongoing forest management plan or for salvage purposes because of insect, disease or fire damage. Even for those forest estates that qualify, the $1,040,000 limitation on reduction below fair market value effectively excludes substantial acreages.