Ag accountants and attorneys are asking Oregon legislators to clarify how estate tax exemptions are applied to trusts and family corporations. (Courtesy Oregon Department of Transportation)

Agricultural accountants and attorneys are urging Oregon lawmakers to revise an estate tax exemption for farm families before the upcoming end of the legislative session.

Up to $15 million in natural resource assets were exempted from Oregon’s estate tax two years ago for family farm and forestland owners, but agricultural accountants and attorneys say the law doesn’t account for the complex corporate structures of some operations.

“The statute, as it is, is wonderful — it’s just not very complete about how entities and trusts are to be dealt with, with respect to this exclusion,” said John Draneas, an agricultural accountant and attorney in Lake Oswego, Ore.

The fear is that unless the estate tax exemption is revised, farm families with complex structures will not be able to use it in their succession plans, negating the law’s purpose to preserve multi-generational operations, proponents say.

“Without this natural resource exemption being workable for family businesses, it is not going to work,” said Barbara Smith, an attorney in Salem, Ore., with agricultural clients.

If children believe they will have to sell the family farming operation to pay estate taxes when their parents die, for example, it’s likely they’ll pursue other careers than agriculture, she said.

That raises the possibility that more farm and forestland will be bought by speculative investors who will be eager to develop the properties, Smith said. “You won’t have the great stewardship our farmers provide.”

House Bill 3630, which aims to resolve the problems identified by experts, recently passed the House unanimously, but the proposal must still be passed by the Senate before the legislative session must conclude June 27.

Though the vast majority of Oregon farms are owned by families, experts say their ownership is often spread across several corporate entities. This structure is intended to protect against liability and to reflect the varying levels of participation of family members in various operations.

For example, a farming operation may be owned by a shareholder corporation while the property is owned by a limited liability company, shielding the farmland from lawsuits against the business.

Meanwhile, families establish trusts to prepare for unanticipated changes that may affect the ownership.

“The reason there are trusts is to protect the farmland. We want to make sure that the sister who is in town gets treated equally, but that the money does not walk away with her ex-husband in the divorce,” said Heather Gilmore, an estate attorney in Salem, Ore.

Under HB 3630, business entities or trusts would qualify for the exemption as long as they’re owned by eligible family members. The bill would also allow for property transfers among such corporations, among other provisions.

To qualify for the exemption under current law, property must be owned by farmers at least five years before their deaths, and by their descendants at least five years after. This provision is meant to ensure only family farms can benefit from the law.

The bill would allow families that move assets from one entity to another to still take advantage of the exemption, said John Hawkins, an accountant who works with farmers in the Willamette Valley.

“If they’re both family-owned, it is not going to be an event that will trigger a recapture of the tax,” Hawkins said.

The bill’s provisions will also guard against unexpected ownership changes disqualifying families from using the exemption, which is a concern under the existing language, said Gilmore.

“If mom dies or dad dies first, and the surviving spouse does not survive five years, we’re not sure this exemption is available because they haven’t held it for the five-year holding period,” she said.

Another concern with the existing exemption is that requiring assets to be owned by a family for five years before and after a qualifying death will hinder the replacement of equipment that may wear out sooner, experts say.

“Not everyone can own a tractor for 10 years. Sometimes things break down,” Gilmore said. “We want to be sure that if there is replacement property, that it qualifies.”

Supporters of HB 3630 argue it’s imperative to make the exemption feasible because it’s difficult to sell portions of farmland after a death without endangering the operation’s financial health.

At the same time, the exemption is relevant to many “land rich and cash poor” families who have seen their farmland assets rise tremendously in value, according to proponents.

In the past 35 years, for example, farmland in the Willamette Valley has “skyrocketed” from about $100-$300 per acre to about $25,000-$35,000 an acre, Gilmore said.

“It’s that same farmland that their great-grandpa farmed, it is the same farmland they grew up on, learning to drive a tractor, but there is appreciation,” she said.

Tax Fairness Oregon, an organization that advocates for tax reform to reduce income inequality, opposed the original tax exemption but is neutral on the revisions proposed in HB 3630.

However, the group has asked lawmakers to shelve the bill this year and instead hold further negotiations on the proposal to make broader estate tax improvements — including a provision that would cap the total amount of assets eligible for the exemption.

As it stands, the exemption can be used by extremely wealthy families with diversified businesses in which natural resources only represent a portion of the assets, the organization said. “While this bill addresses some minor issues, much more important and more thorough work needs to be done between sessions.”

In a recent hearing before the Senate Rules Committee, lawmakers discussed the estimated “minimal revenue impact“ that HB 3630 is expected to have on tax collections. Supporters confirmed the revisions are not meant to increase the amount of assets covered by the exemption.

“What that tells me is, in practical effect, we are not expanding the category that would be able to take benefit from this arrangement,” said Sen. Jeff Golden, D-Ashland, the committee’s chair.