On May 22, Governor Martin O’Malley signed into law a bill that many of you may have already heard about. Chapter 448, or the “Family Farm Preservation Act of 2012,” aims to ease the estate tax burden on the survivors of deceased Maryland farmers whose livelihood is transferred to the family’s next generation.
What you may not have heard about is the controversy surrounding the law.
Traditionally, estate and inheritance taxes have hit agricultural families much more harshly than their suburban counterparts because while family-owned farms are rich in property and machinery value, they typically lack substantial liquid assets—that is, they have a ton of valuable land but no actual money to speak of.
These small businesses are often crippled when they are forced to sell off huge chunks of their land and pieces of agricultural equipment in order to pay the second most prohibitive estate/inheritance tax rate in the country.
While the Family Farm Preservation Act won’t solve all of the current legal and tax problems of the Maryland farmer, it could provide a degree of relief to thousands.
Southwick Associates, a company specializing in fish and wildlife economics and statistics, observe, “The Delmarva Peninsula has nearly 7,000 farms, of which nearly 5,500 are individual or family farms. The average value of the land and buildings on each of those farms is $1.8 million.” (from Dana Amihere, “Law Protects Future of Family Farms”).
Note that the Maryland estate tax exemption is for only $1 million and part of every dollar beyond that amount goes to the state; most family-owned farms on the Eastern Shore currently pay the same 16% estate tax as every other Maryland resident but with much less money available to do so.
Effective July 1, 2012, and applicable to decedents dying as of January 1, 2012, the new law essentially elevates that exemption from $1 million to $5 million and cuts the rate thereafter from 16% to 5% for property used for agricultural purposes as long as it remains to be used that way for ten years after the decedent’s passing. In other words, you can’t simply inherit your dad’s farm tax-free and then turn around and sell it off to a housing developer.
However, there is some serious dissent in Attorney-ville about what you can do in that position.
The legislative history of the law clearly indicates it is meant to keep family-owned farms in the family; the law itself clearly indicates someone screwed up. The FFPA does not reflect the aforesaid intention in a key section that secures the $5 million exemption on agricultural property that passes “to or for the use of” a “qualified recipient.”
Part of the problem is determining what is a “qualified recipient?”
The paperwork defines “qualified recipient” as “an individual who enters into an agreement to use qualified agricultural property for farming purposes after the decedent’s death.” Though heirs are often family members, they don’t need to be to receive the exemption here. A bit out of place for a law meant to keep it in the family, as it were.
The (potentially) bigger issue is the phrase “or for the use of.” This wording fortuitously allows the land to be property to be transferred to a trust, LLC, or similar entity without losing the tax break as long as the land continues to be farmed. What it also seems to allow is for an heir to capture the tax break and then sell the land to another buyer outside the family who may continue reap the tax benefit as long as it is used agriculturally for the requisite ten-year period.
The law in effect restricts the use of the land rather than who may use it.
Now, it’s likely that the General Assembly will eventually pass a clarifying amendment prohibiting this clause from being so exploited.
Until then, perhaps it would be more appropriate to nix “Family” from the title of “The Family Farm Preservation Act.”
Or we could just go with “Chapter 448” and call it a day.
If you have any further questions about the law, you can find out how to reach us at our website: TheFisherLawOffice.com. You can also find us at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.
As always, good luck and good hunting.
- Why Farmers Need an Estate Plan (thefisherlawoffice.wordpress.com)
- “Small” Estates Get Bigger for Maryland Probate (thefisherlawoffice.wordpress.com)
- Marriage, Estate Equality Prevail in Maryland Referendum (thefisherlawoffice.wordpress.com)