Graduate Thesis Or Dissertation
 

Impacts of business organization form on federal estate and income tax liabilities of nonindustrial private forest landowners

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https://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/gm80hx96j

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  • 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.
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