Family’s ranching heritage at stake in inheritance tax battle


By Jennifer Whitlock

At 84 years old, Melville Steubing has been involved in ranching since he could walk. And his family’s ranching heritage runs even deeper.

From the first year his German immigrant ancestors set foot on Texas ground in the 1840s until today, there has never been a time when the Steubings were not involved in agriculture.

But everything he and his ancestors have worked to pass on to future generations may be lost forever, thanks to devastating inheritance tax proposals being considered in Congress.

Having spent 25 years as an Internal Revenue Service (IRS) agent, Steubing is no stranger to the American tax code. The current proposals included in President Joe Biden’s proposed fiscal year 2022 budget are some of the worst ideas he’s ever seen.

“I’m scared and really afraid that if they pass these tax laws, the unintended consequences will cause a lot of ranch families to have to sell,” he said. “If they do this, my daughters will not be able to keep our property.”

Through his American Families Plan, Biden proposed ending the step up in basis for gains upon death, raising capital gains taxes and deeming death and gifts as transactions, among other changes.

A ranch family’s heritage

As the youngest son of a large family, Steubing grew up hunting and ranching on a large spread in Converse, northeast of San Antonio. Despite the large parcels of land associated with the family name, times were tough.

Steubing said he took accounting courses and obtained his teaching certificate so he would always have three different ways to earn an income: farming, accounting and teaching.

During school, he met Cinda Howard, who had a similar background growing up on a family ranch in Iola. They married after graduating from Sam Houston State University and began raising their own family while helping with their family’s ranches.

“At first, I had to have another job just to ranch, before I inherited or bought land on my own. I worked in the daytime for the IRS with a suit on. I’d come home, jump in my blue jeans, and we’d go ranching and feed cattle in the evenings,” he said. “We worked as hard as we could, and we got to where we are now with some inherited property plus investment property and reinvesting into land whenever we could.”

Melville and Cinda’s love for ranching flows in the veins of their children. Their daughter and son-in-law, Beverly and Gary Box, have managed the Steubings’ Carrizo Springs operation since 1983. They also bought their own property where they have a cattle and deer-breeding operation and grow hay. Three years ago, they began leasing Beverly’s parents’ property and now make all management decisions and oversee daily operations.

A family’s future in jeopardy

The Steubings plan to leave their properties to their daughters when they pass so they can continue the family’s ranching heritage. But Biden’s tax proposals have them extremely concerned that future generations’ inheritances may be gobbled up by taxation.

Right now, Steubing explained, when a person dies, the decedent’s property, or estate, is valued at the date of death.

The heirs, who are charged an estate tax up to a top tax rate of 40%, receive a step up in basis on the value of the assets. If the assets have appreciated between the time when they were originally purchased and when the heir inherits, the basis is stepped up to fair market value without incurring any capital gains taxes.
If an heir inherited property that was given a fair market value of $2.2 million and sold that property for $2.2 million, under current law, they will not pay any capital gains taxes.

But Biden’s proposal would eliminate the step up in basis and instead shift inherited property to a “carryover” basis. Instead of allowing an heir to step up basis to current value, they would take on the basis of the property when it was acquired by the decedent.

In the same scenario, an heir with an inherited property purchased at $200,000 that is now worth $2.2 million who sold the property would owe capital gains taxes on $2 million.

This is a common situation when land has been passed down through generations, Steubing noted. Land was often purchased for much less than its value today, even accounting for inflation. In Texas, U.S. Department of Agriculture Land Values Summary data indicate cropland values have changed 201% from 1997 to 2020.

“The stepped-up basis doesn’t make that much difference if you keep the land or house or whatever you inherited forever. If it’s worth $1,000 or $1 million, it doesn’t matter. You’re not selling anything, so there’s no capital gain,” he said. “But if you ever have to sell some of the land to finance a new piece of equipment or to buy some more cattle, losing that step up in basis would really make a lot of difference. It would likely coincide with a much higher tax on the capital gains.

So, it’s multiplying taxes tremendously on one transaction.”

That’s because the Biden administration indicated it would tax capital gains for “high-income earners” at ordinary rates. In the situation of the heir with the $2 million carryover basis, that gain would count toward their adjusted gross income (AGI), possibly pushing them above a $1 million AGI cap. The heir would then have to pay ordinary income tax rates of up to 37% on the capital gain. The current top capital gains tax is 20%.

Despite Biden’s explanation that raising capital gains taxes would only impact the wealthy, it would affect more family-owned farms and ranches. In 2018, according to IRS data, nearly 40% of family farms and ranches reported some capital gains or losses, compared to about 14% of average individual taxpayers.

Another issue at stake is deeming death a “transaction.”

Adding to the example provided, the heir whose property was purchased for $200,000 and worth $2.2 million would now have to pay capital gains taxes on the $2 million gain, despite no actual sale occurring.

The situation seems unconstitutional to Steubing.

“Deeming death as a sale or transaction would be awful. It would force people to sell. It’s one of the worst things that could ever happen,” he said. “How is it fair when you have property 64 years, like this land here in Carrizo Springs that my dad bought, and you have to pay the difference between the $100 per acre it was purchased for and the $2,000 or $3,000 an acre it’s valued at now and not even have a sale? Where do you get the money to pay for that?”

The value of many farms and ranches is tied up in land, equipment and livestock, he noted. Most families don’t have the money needed to pay those capital gains taxes and would be forced to liquidate.

“The bad part is what this will do to the agricultural industry. If you own stock in a company, you can sell whatever stock you need to pay taxes,” Steubing said. “But here, you disrupt the whole industry. Many family businesses have higher markups or can adjust their sales. Farmers and ranchers are price-takers. We’re on the end where we can’t control anything.”

He worries about who will be there to purchase the floundering family farms and ranches, should the tax changes come to pass. The executives at big tech firms? Investment firms? Foreign sources? Developers? He wonders who will be left to grow and raise food.

“The family farm and ranch wouldn’t exist anymore,” he said.

An uncertain way forward

If the tax proposals were enacted, it would “destroy” the Steubings’ ranches.

“And now, if after we all put all this effort in—me, all my grandparents and parents, my wife and her daddy and all her ancestors—we’ve worked very hard to get to this point to where we can actually have an income without needing to have another job. But if they enact these taxes, my daughters will not be able to keep the property,” Steubing said. “My daughters and their children would have to work from scratch with what little we would have left and have extra jobs to try to build it back up to where it was, and they could probably never get that far with land prices and inputs being what they are these days.”

Although there are many challenges ahead, Steubing is adamant he has no plans to quit ranching or sell land before his daughters inherit.

He urged anyone with a farm, ranch or small business to contact their legislators and let them know how detrimental this legislation will be to their operations.

Although the impact may vary, farms and ranches of every size will be affected.

“All I want to tell everybody is to please fight this. It is a matter of life and death for farmers and ranchers,” he said. “I’ve seen how bad tax laws can affect people.”

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