By DAVID CAY
JOHNSTON The farmland alone is worth
more than $2.5 million, and so Mr. Riekena, 61, fretted that
estate taxes would take a big chunk of his three grown
daughters' inheritance. That might seem a reasonable
assumption, what with all the talk in Washington about the
need to repeal the estate tax to save the family farm. "To
keep farms in the family, we are going to get rid of the
death tax," President Bush vowed a month ago; he and many
others have made the point repeatedly. But in fact the Riekenas
will owe nothing in estate taxes. Almost no working
farmers do, according to data from an Internal Revenue
Service analysis of 1999 returns that has not yet been
published. Neil Harl, an Iowa State
University economist whose tax advice has made him a
household name among Midwest farmers, said he had searched
far and wide but had never found a farm lost because of
estate taxes. "It's a myth," he said. Even one of the leading
advocates for repeal of estate taxes, the American Farm
Bureau Federation, said it could not cite a single example
of a farm lost because of estate taxes. The estate tax does, of
course, have a bite. But the reality of that bite is
different from the mythology, in which family farmers have
become icons for the campaign to abolish the tax. In fact,
the overwhelming majority of beneficiaries are the heirs
of people who made their fortunes through their businesses
and investments in securities and real
estate. The effort to end the estate
tax (which critics call the death tax) gained ground when
the House of Representatives voted Wednesday to reduce the
tax and then abolish it in 2011. The bill faces an uncertain
fate in the Senate. The estate tax is central in
the debate over taxes, not only because the sums involved
are huge but also because to both sides it is a
touchstone of national values. To those seeking to
abolish it, the estate tax is a penalty for success, an
abomination that blocks the deeply human desire to leave a
life's work as a legacy for the children. It is also a
complicated burden that enriches the lawyers, accountants
and life insurance companies that help people reduce their
tax bills. To its supporters, on the
other hand, the estate tax is a symbol of American
equality, a mechanism to democratize society and to
encourage economic success based on merit rather than
birthright. Yet for all the passion in
the debate, the estate tax does not always seem broadly
understood. While 17 percent of
Americans in a recent Gallup survey think they will owe
estate taxes, in fact only the richest 2 percent of
Americans do. That amounted to 49,870 Americans in 1999. And
nearly half the estate tax is paid by the 3,000 or so
people who each year leave taxable estates of more than $5
million. In fact, the primary
beneficiaries of the move to abolish the estate tax look
less like the Riekenas and more like Frank A. Blethen, a
Seattle newspaper publisher whose family owns eight
newspapers worth perhaps a billion dollars. "Being ever bloodthirsty,
the I.R.S. will start with the highest value it can on my
estate," said Mr. Blethen, the 55-year-old patriarch of the
publishing family. The figure for his share will probably be
several hundred million dollars, more than half of which
would go to the government. Mr. Blethen is trying to avoid
almost all those taxes through a plan also used by other
wealthy families, but if he does not succeed his sons'
interest in the business will be wiped out, he
said. Estate taxes are paid by few
Americans because they are not assessed on the first $1.35
million of net worth left by a couple. Amounts above this
are taxed at rates that begin at 43 percent and rise to 55
percent on amounts greater than $3 million. As the Riekenas
and the Blethens have learned, there are many legal ways to
reduce the value of one's wealth for estate tax purposes. So
even for the largest estates, the tax averages 25
percent. Family farmers are often
cited as victims. As Senator Charles E. Grassley, an Iowa
hog farmer and chairman of the Senate Finance Committee, put
it, "The product of a life's work leaches away like seeds in
poor soil." Yet tax return data show
that very few farmers pay estate taxes. Only 6,216 taxable
estates in 1999 included any agricultural land and
equipment, the I.R.S. report shows. The average value of
these farm assets was $440,000, only about a third of the
amount that any married couple could leave untaxed to heirs.
What is more, a farm couple can pass $4.1 million untaxed,
so long as the heirs continue farming for 10
years. In Iowa, the average farm
has a net worth of $1.2 million. Loyd A. Brown, president of
Hertz Farm Management in Nevada, Iowa, which runs more than
400 farms in 10 states, said none of his firm's clients nor
anyone he knew was facing problems because of the estate
tax. Just 1,222 estates in 1999
had enough in farm assets to make the farm property alone
subject to estate taxes. But these farm assets amounted to
one-tenth of these estates, suggesting that the tax applies
mostly to gentleman farmers and ranchers, rather than to
working farmers like the Riekenas, whose fortunes are tied
up in their farms. As the Riekenas were
surprised to discover, avoiding the estate tax was easy.
Their lawyer developed a simple plan that involved making
gifts to their daughters and buying life insurance to offset
any estate taxes that might be due if the parents died
before most of the farm had been turned over to their
daughters. There is a real cost, of
course Ð payments to the lawyer and for the insurance.
And in any case the paucity of affected farmers does not end
the debate. Patricia A. Wolff, the Farm Bureau's chief
lobbyist, said the organization made estate tax repeal its
top priority because, while it has not surveyed its members,
she was confident "the majority of farmers and ranchers
believe that death taxes are wrong and that it is wrong to
tax people twice on what they earn." But Mr. Riekena and all two
dozen other farmers interviewed across central Iowa Ð
every one a Republican Ð said that while they favored
increasing the amount that could be passed to heirs untaxed,
they did not support the repeal proposed by President Bush
and other leaders of his party. A few snickered or laughed
when asked whether the estate tax should be repealed to save
the family farm. But Senator Grassley himself
opposes the estate tax, in large part because he thinks that
while a decision to keep or sell an asset is an appropriate
trigger for a tax, death should not be. He added another reason:
"I do not think that the function of government is to
redistribute wealth." Indeed, that seems to be the
fault line in the debate: should the government play Robin
Hood with estates? "If you worked hard and put
your money away, you paid tax on it as you went along, so
it's yours and you should be able to pass it on to your
children without the government penalizing you," said R.
Elaine Gunland, who grows grapes in Fresno, Calif., and
whose family may owe estate taxes when she dies. Mr. Blethen, the
fourth-generation publisher of a newspaper started in 1896
with $3,000, says he speaks for many others in supporting
repeal of the tax in the name of preserving family
businesses. "I firmly believe that
family- owned businesses are the heart and soul of the
country," said Mr. Blethen, who has created a Web site
called deathtax.com. Mr. Blethen says the estate
tax benefits publicly traded companies at the expense of
family owned businesses. The reason is that the public
companies can often buy family businesses at a discount
because the owners did not raise the cash to pay estate
taxes and must sell quickly at fire sale prices. Mr. Blethen said some of the
seven smaller papers his family bought in Washington and
Maine came from families that had not planned carefully for
the estate tax and decided it was easier to cash
out. "If you like corporate
culture, and think America needs more of it, then you love
the estate tax," Mr. Blethen said. "I think this march
toward corporatism is not healthy and we lose innovation,
jobs and charitable giving." Mr. Blethen said the estate
tax also discouraged major new investments in family
businesses late in the life of the primary owner because
such investments consumed cash that might be needed at any
time to pay estate taxes. He said the estate tax also
"forces you into irresponsible gift making" to heirs. He
felt compelled to give half the future growth of his fortune
to his two sons when they were not yet kindergartners even
though he had no way of telling whether the boys would turn
out to be industrious, as they did, or scalawags. Despite his fierce
opposition to the estate tax, Mr. Blethen does not support
President Bush's current plan to repeal the tax because it
would also exempt from capital gains taxes the profits on
assets passed to heirs when those assets are sold. "That's
not fair," Mr. Blethen said. He said Mr. Bush's proposal
would have the perverse effect of encouraging the sale of
family owned businesses, because heirs would see death as
their chance to sell tax-free and to diversify their
portfolios, instead of continuing to bear the risks of
holding a single enterprise. Mr. Blethen thinks that
rather than taxing an estate, taxes should apply when a
business is sold. "You want to defer those capital gains and
let them grow so large that the family will keep the
business to avoid the capital gains taxes," he
said. The debate does not divide
neatly among rich and poor. Since February more than 800
wealthy Americans have joined in a public appeal to keep the
estate tax. They argue that repealing the tax would further
enrich the wealthiest Americans and hurt struggling
families. They also argue that financial success should be
based on merit rather than on inheritance. Warren E. Buffett, George
Soros, Paul Newman and William H. Gates Sr., father of
Microsoft's chairman, William H. Gates III, are among the
most prominent in that group, which also includes many
people with holdings of just a million dollars. Mr. Buffett said the estate
tax fosters economic growth by encouraging Americans to rise
based on merit, not inheritance. "If you take the C.E.O.'s
of the Fortune 500," he said in an interview, "and put in
the eldest son of every one of those who ran the place in
1975, the American economy would not run as well as letting
the Jack Welches, who started out with nothing, rise to the
top of General Electric." Back in central Iowa, Mr.
Riekena had another reason. He said Washington was focused
on the wrong issue when it came to saving family
farms. "For most farmers around
here, the estate tax is not high in their minds," Mr.
Riekena said. "What we need are better crop
prices."
The New York
Times, April
8, 2001
ELLSBURG, Iowa Ð Harlyn Riekena worried that his success
would cost him when he died. Thirty-seven years ago he quit
teaching to farm and over the years bought more and more of
the rich black soil here in central Iowa. Now he and his
wife, Karen, own 950 gently rolling acres planted in
soybeans and corn.