WASHINGTON ― The federal estate tax is so burdensome that Rep. Kristi Noem’s family spent 10 years in debt just to pay the bill after her father died in a farming accident, the South Dakota Republican has repeatedly claimed throughout her political career.
Republican leaders love this tale of hardship so much they appointed Noem to the committee that negotiated the final version of their tax legislation, which will make the estate tax far more lenient, a change Republicans say will protect farms and small businesses.
But documents from Noem’s father’s estate show the congresswoman has omitted important details. After her father died in 1994, Noem’s mother received a life insurance payout big enough to pay the estate tax bill several times over, according to documents that HuffPost obtained from Hamlin County’s clerk of courts.
Since taking office during the Tea Party wave of 2010, Noem, who is now running for governor of South Dakota, has never mentioned the insurance nor disclosed the amount of the tax, though she’s characterized it as a crushing burden.
“We had a tough choice: sell off a portion of our family farm or face a decade in debt,” Noem wrote in a Fox News op-ed last month. “We took a decade in debt and struggled to keep our heads above water.”
Taxes can indeed be a burden, but Noem’s story shows that contrary to Republican talking points about how the “death tax” hurts farmers and small business owners, the tax actually comes with special provisions designed to accommodate them.
In Noem’s case, it was a fluke the tax hit her family at all: Noem’s father, Ron Arnold, had an outdated will that failed to utilize a marital deduction allowing the entirety of an estate to pass to a surviving spouse untaxed. In other words, if it weren’t for poor planning Arnold’s estate wouldn’t have faced any tax.
Probate documents show the land, machinery, livestock and other property owned by Arnold were worth $4.5 million. After subtracting debts and other deductions, the taxable estate came to $1 million. Though the documents don’t specify how much estate tax was owed, experts say it was probably about $169,000.
A six-figure tax bill is nothing to sneeze at, but neither is a seven-figure insurance payout. Though Noem’s father had failed to update his will, he had done a good job of making sure his family would have some cash. Noem’s mother received $1.1 million from her husband’s life insurance policies, most of which she apparently loaned to the estate.
Noem has refused to answer HuffPost questions about the estate over the course of several brief interviews in U.S. Capitol building hallways over the past few weeks, except for one interview in which she incorrectly said her father didn’t have a will. In an op-ed for the Argus Leader, Noem said the probate documents corroborated her story. Her office has declined to provide information in response to specific questions about the documents.
This policy is bad policy, so it needs to be ended. It's an unfair double tax Rep. Kristi Noem (R-S.D.)
On Tuesday, after the House voted on its tax legislation, HuffPost asked Noem why an estate tax bill for an estimated $169,000 would have been so burdensome for a family that received $1 million worth of life insurance. It could have been the case, for instance, that other debts were more pressing ― but Noem kept walking and said nothing.
She spoke up when HuffPost noted that Republicans had used her family story to justify reducing the estate tax. “It’s not the justification,” Noem said. “This policy is bad policy, so it needs to be ended. It’s an unfair double tax.”
In the 1990s, the estate tax had a graduated rate schedule, which would have produced a $168,538 tax for a taxable estate worth $1 million, said Robert Lord, a Phoenix, Ariz., tax lawyer and fellow at the Institute for Policy Studies, a progressive think tank.
The tax can be deferred for the portion of an adjusted gross estate that is a farm or closely held business and then paid in installments over a decade. Since about half of Arnold’s adjusted gross estate related to the farm and half came from his life insurance policies, the estate would have been able to pay half the $168,535 on the IRS installment plan.
A filing from 1995, the year after Arnold died, indicates the estate’s trustees had assumed responsibility for the “balance of the federal estate tax due in the amount of approximately $84,454.00 plus interest accruing” ― roughly half of Lord’s estimate for the full tax.
The debt Noem has repeatedly referenced may have been the installment plan, which at the time offered a 4 percent interest rate ― less than half the prime interest rate in 1995. (Today the installment plan for farms and businesses offers a 2 percent interest rate.)
“The ability to effectively borrow that $84,000 portion of the estate tax liability and pay it back to the IRS over 10 years, the terms are such that you would take advantage of that and keep that loan outstanding while paying off every other debt,” Lord said.
Noem’s office did not respond when HuffPost asked specifically if Arnold’s estate had opted for the installment plan.
Lord said Arnold probably bought the insurance specifically so that a portion of it could be used to deal with the estate tax. Other estate tax experts agreed it would be reasonable to take advantage of the favorable IRS terms for the farm portion of the estate.
Estate attorney Beth Kaufman, president of the tax law firm Caplin & Drysdale, said there are three main reasons someone might buy life insurance. One is simply to provide for a family that loses its main breadwinner, another is to use as an investment and the third is to generate cash for paying the estate tax.
Kaufman said that because the insurance wound up as part of Arnold’s estate ― instead of in a tax-advantaged trust ― Arnold may have simply bought the insurance for the more traditional reason of providing for his family.
“When people buy life insurance for estate liquidity purposes they almost always put their insurance in a life insurance trust,” Kaufman said.
Roughly 8 percent of estates that had farm assets were valuable enough to be subject to the tax but didn’t have enough liquidity to pay it in 2000, according to the Congressional Budget Office. That’s about 138 estates that either had to use the installment plan or sell physical assets such as land.
But back then, the tax kicked in for estates worth more than $650,000. Today the first $11 million of a married couple’s estate is exempt from tax, and for people who die next year, the exemption level will be $22 million thanks to the Republican tax plan.
Only about 5,500 estates are taxable annually under current law, according to the Tax Policy Center, which amounts to 0.2 percent of all estates and roughly 80 farms and businesses. The overall number of taxable estates will fall to 1,700 under the new law.
Arthur Delaney co-hosts the HuffPost Politics podcast: