Estate Tax Relief for Some Family Farmers: The Williamson Family Farm Story

In 1976, Congress created an exception to estate tax rules -- special use valuation -- to enable family farmers to pass their farms from one generation to the next. Prior to 1976, heirs who inherited family farms were often forced to sell the family farms in order to pay high estate taxes. Family farms were (and are) often worth a lot of money because farmland, the main farm asset, is worth a lot of money. For family farms worth more than $600,000, heirs were required to pay between 37% and 55% of the farm’s fair market value in estate taxes. The modest incomes generated by family farms were often insufficient to pay these high estate taxes.

To address this threat to family farms, Congress enacted a special use valuation provision. The special use valuation provision permits persons who inherit family farms to elect to have estate taxes calculated based on the farmland’s value when used for farming rather than on the farmland’s fair market value (an estimate of the farmland’s value if used for its most profitable use). In exchange for paying lower estate taxes, persons inheriting family farms must agree to use the farms for farming purposes for at least 10 years.

In Williamson v. Commissioner, 974 F.2d 1525 (9th Cir. 1992), the 9th Circuit Court of Appeals was asked to decide whether the special use valuation provision applied to the Williamson family farm. The Williamson family farm seemed to be the type of farm that Congress intended to protect by enacting the special use valuation provision. The elder Williamsons, who initially owned and operated their family farm in Chippewa County, Minnesota, intended to pass on their farm to younger family members. While their son, Beryl Williamson, was not interested in farming, their grandson, Harvey Williamson, was interested in taking over the family farm. Thus, at some point, either when the elder Williamsons decided to retire or when the elder Mr. Williamson died, their grandson Harvey began operating the farm.

At the time of Mrs. Williamson’s death, Harvey was operating the family farm and leasing the land from Mrs. Williamson under a crop-share lease. The crop-share lease benefited both Mrs. Williamson and Harvey; the lease provided a source of retirement income for Mrs. Williamson and enabled Harvey to take over operational control of the farm before he had sufficient money to purchase the farmland. When Mrs. Williamson died, she devised her most valuable asset, the farmland from the Williamson family farm, to her only son, Beryl. Beryl continued to lease the farmland to Harvey (now with a cash lease), and Harvey continued to operate the farm.

In Williamson, the 9th Circuit held that the special use valuation provision did not apply to the Williamson family farm. Next, I’ll explain the court’s reasoning in Williamson and Congress’s response to the Williamson decision.