John Greene's Program Notes:

1. Who did the study and who was surveyed?

This was a cooperative study between the Forest Service Southern Research Station and Mississippi State University. Dr. Steve Bullard at Mississippi State and his graduate student, Tammy Cushing, conducted the survey, and I helped with the data analysis. We surveyed randomly selected members of two national forest owner groups – the American Tree Farm Association and the National Woodland Owners Association. We also surveyed randomly selected rural landowners, to see how they compare to forest owners.

2. What kind of questions did you ask on the survey?

We asked whether the person who received the questionnaire had been involved in the transfer of an estate between 1987 and 1997. If they said “yes,” we asked them a series of questions about the estate itself, whether “special use” valuation was applied to the land or timber, whether estate tax was due, and if it was, what assets were used to pay it. We specifically asked if timber or land had to be sold to pay the estate tax.

3. And what did you find?

We found that the proportion of forest estates that owe federal estate tax is many times higher than the U.S. population in general. This really points up how important it is for forest owners to have an estate plan.

We found that only about a third of forest estates qualify for “special use” valuation, which permits an executor to appraise assets used in farming or in a trade or business according to their value in use rather than their market value. We think this is because the regulations for “special use” valuation make it hard for forest land to qualify.

We also found that in 40 percent of the cases where estate tax is due, timber or land has to be sold because there weren’t enough other assets to pay the tax. This doesn’t just happen with small holdings – estates as large as 2,000 acres reported they had to sell timber and estates as large as 10,000 acres reported they had to sell land.

The amount of land that estates sold averaged a little under 400 acres, and nearly 30 percent wound up being converted to more developed uses.

Finally, we found that forest estates and other rural estates are alike in more ways than they are different. This means there are avenues for estate tax relief that would benefit both groups, things like:

• A targeted increase in the effective exemption amount for estates that consist largely of working assets – like land or timber;
• Revision of the requirements for “special use valuation,” to permit timber harvests made in accordance with an written management plan; or
• Recognition of a business structure for family farms and forests – something like a rural family enterprise – to ensure that they qualify for business-oriented provisions in the tax code or to facilitate the transfer of working lands.

4. Won’t the tax act passed in 2001 eliminate the estate tax and reduce the need for estate planning?

There is a lot of interest right now in reducing or eliminating the estate tax, so the situation is likely to change from year to year. The law now in effect is the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA will reduce the number of forest estates subject to the federal estate tax, but slowly, over a number of years. One in 5 forest estates will owe estate tax from 2002 through 2005 when the effective exemption amount for estates is scheduled to be $1 million. One in 10 forest estates will still owe estate tax from 2006 through 2008, when the effective exemption amount is scheduled to increase to $2 million. And as many as 1 in 20 forest estates still will owe estate tax in 2009, when the effective exemption amount is scheduled to increase to $3.5 million. EGTRRA would eliminate the estate tax in 2010, but restrict the “step-up” in basis that heirs receive. Then in 2011 the situation would return to pre-EGTRRA law.

Planning remains important because we just can’t know what the law will be in any year until we get there. And besides, there are lots of reasons besides taxes to have an estate plan.