Impacts of Federal Estate Taxation on Investments in Forestry

Abstract

The Federal Tax Reform Act of 1976 includes major revisions of federal gift and estate tax laws that will greatly affect the private, nonindustrial forest landowner who has inherited forest property from a family member. Estate taxes impose problems for any family. But for an estate made up primarily of timber and land, the problems encountered can be particularly difficult. First, because forest property is often more valuable (according to appraisers) than many owners realize, the magnitude of the debt is often unexpected. Second, even if the magnitude of the tax is anticipated, liquidity-or lack of itheavily affects the ability to pay the federal estate tax. Cash or readily marketable assets might not be sufficient or available, forcing the new owner to cut timber to pay the tax. However, in choosing this option, the new owner incurs costs beyond the estate tax itself. These include federal and state income taxes on capital gains from harvested timber, and yield taxes in those states assessing timber harvests. Depending on the local market, buyers may take advantage of the property owner's need for cash by offering low timber prices. Most important, and often overlooked, are the reductions in cash flow and present net worth of the forest estate resulting from forced sales to pay the tax. Our objectives are to analyze how new estate tax laws affect forest property owners for different forest conditions, and to determine present net worth of forest estates for varying age-class distributions and stocking levels when the new forest owner (heir) must fund the estate tax by selling standing timber.