Abstract:
Detrimental impacts of estate taxes on management of private
nonindustrial forests can be mitigated by estate planning which
considers organizational forms of forest businesses and methods for
funding estate settlement costs. This study's objective was to determine
effects of business form and estate funding method on income
and estate tax liabilities of nonindustrial owners.
A deterministic, legal-economic forest estate management model
was used to simulate estate and income tax consequences of alternative
business form and funding method combinations for typical
Oregon nonindustrial forest owners. Business forms analyzed were
sole proprietorships, partnerships, close corporations, Subchapter
S corporations and testamentary trusts. The three estate funding
techniques were immediate timber capital liquidation, deferrals
through Internal Revenue Code section 6166 and loans, and life
insurance. Subchapter S corporations and partnerships, coupled
with deferrals, were expected to have the least income and estate
tax-induced reductions in present value of gross cash value. Sensitivity of results was tested by changing seven parameters: alternate
rate of return, life expectancies, real land and timber
price trends, total forest acreage, initial forest age class distribution,
management regime, and rotation age.
Simulation results were consistent across base and sensitivity
runs. Testamentary trusts were least costly due to estate tax
savings obtained by excluding part of the business from the widow's
estate and income tax savings caused by post-mortem step-ups in
timber cost basis. Partnerships and Subchapter S corporations were
almost as cost effective because spreading business interests among
family members reduced effective estate and income tax rates. Because
its costs are postponed farthest, immediate liquidation was the
preferred funding option. Deferrals frequently created negative
after-tax cash flows during loan repayment periods.
Forest owners should select business forms which allow reductions
in the business interest includable in the widow's estate,
preserve timber income's treatment as long-term capital gains, and
provide income tax savings by spreading income among family members and
utilizing post-mortem step-ups in cost basis. Trusts, partnerships,
and Subchapter S corporations have these attributes.
Despite changes enacted in the Economic Recovery Tax Act of
1981, land owners, dependent on forest income, may still encounter
estate tax-induced cash flow problems.
