WASHINGTON ― Rep. Kristi Noem has repeatedly told the story about how the federal estate tax hurt her family’s business after her father died in a farming accident in 1994.
“A few months afterward, we got a letter from the IRS telling us we owed the Death Tax,” the South Dakota Republican wrote in a Fox News op-ed last month. “We were still reeling from the loss of the powerhouse in our family, and already, the government was reaching out its hand to take part of our American Dream.”
Republican leaders have appointed Noem, who is running for governor of South Dakota, to the powerful conference committee that will resolve differences between the different tax reform bills passed by the House and Senate in recent weeks. The House bill repeals the estate tax, while the Senate bill keeps it in a weakened form. Noem will have a chance to kill the tax that she said hurt her family.
But Noem’s case is probably not a good example of how the estate tax works.
“Estate” is a legal term for a person’s possessions at death. Under current law, the estate tax kicks in when a person dies only if their estate is worth more than $5.49 million after deductions. In 1994, only the first $600,000 of a taxable estate was exempt, so the tax has gotten a lot less stringent in the years since Noem’s father died.
Another important feature of the law, both now and in 1994, is that the full value of the estate can be transferred to a surviving spouse tax-free. Noem’s mother was still alive when her father died, but the family may have missed out on the unlimited marital deduction due to bad luck.
“My dad had done estate planning, he had had a will completed, but he hadn’t gotten it signed before he was killed,” Noem told HuffPost on Wednesday.
Under South Dakota law in 1994, if a decedent hadn’t signed a will, then only one-third of the estate would transfer to the spouse, while two-thirds would go to the children, according to Dan Donohue, a South Dakota attorney who has specialized in estate, trust and probate law for more than 40 years.
“As that relates to the federal estate tax, the two-thirds that did not pass to the spouse, that would essentially constitute for federal estate tax purposes the taxable estate,” Donohue said.
In other words, Noem and her three siblings could have had to pay taxes on their portion of their father’s estate above the $600,000 exemption, with a one-time tax of between 18 percent and 55 percent, depending on the estate’s value. (Today, the tax has a flat rate of 40 percent.) Noem hasn’t disclosed how much her father’s estate was worth, but said the family took out a loan to cover the cost.
When HuffPost asked Noem why the estate hadn’t transferred to her mother, she said she was “not going to keep talking about that.” A spokesperson did not respond to a subsequent request for comment.
South Dakota changed its “intestacy” law the very next year, in 1995, so that in the absence of a will, the surviving spouse would automatically receive a decedent’s full estate so long as the surviving children are children of the spouse. Beth Kaufman, president of the tax law firm Caplin & Drysdale, said that most states have adopted similar laws.
“The thought is, as long as they’re her children, [the surviving spouse] takes care of the children anyway,” Kaufman said.
Very few estates are valuable enough to be subject to the estate tax today. A married couple gets an exemption for both spouses, meaning the first $11 million isn’t taxed at all. As a result, the Joint Committee on Taxation has estimated only the richest 0.2 percent of taxpayers’ estates are subject to the tax. The nonpartisan Tax Policy Center has estimated that only about 80 small farms and closely held business will be subject to the tax this year.
Nevertheless ― probably in part because of dishonest political rhetoric ― 30 percent of Americans surveyed by HuffPost this fall said incorrectly that most families have to pay the tax.
Both the House and Senate tax bills would double the value of the exemption, with the House version fully repealing it after 2024. Some House Republicans have said they could accept the Senate’s non-repeal of the estate taxes, but Noem declined to make a prediction.
“We’ll see,” Noem said. “I’ve always viewed the death tax as one of the most unfair taxes.”