Rich Cling to Life to Beat Tax Man
Nothing’s certain except death and taxes — but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules.
Starting Jan. 1, the estate tax — which can erase nearly half of a wealthy person’s estate — goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life’s most trying episodes only more complex.
“I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days,” says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. “Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?”
Currently, the tax applies to about 5,500 taxpayers a year. So, on average, at least 15 people die every day whose estates would benefit from the the tax’s lapse.
The macabre situation stems from 2001, when Congress raised estate-tax exemptions, culminating with the tax’s disappearance next year. However, due to budget constraints, lawmakers didn’t make the change permanent. So the estate tax is due to come back to life in 2011 — at a higher rate and lower exemption.
To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. “We have done this at least a dozen times, and have gotten more calls recently,” says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.
Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.
“Whenever he wakes up,” says his lawyer, “He says: ‘What day is it? Is it Jan. 1 yet?'”
Estate-tax experts didn’t expect Congress to allow the tax to lapse, and are flabbergasted that it is actually happening. “All fall when I gave speeches, I said I was willing to bet anyone in the room $10 that we would have an estate-tax extension by the end of the year,” says Thomas Ochsenschlager, head of taxes for the American Institute of CPAs. “Thank goodness I didn’t have any takers,” he says.
Now, all bets are off. “If Congress couldn’t do it this year, why will they be able to do it next year?” says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse “congressional malpractice.”
Under current laws in effect until the end of this year, the size of the exemption is $3.5 million per individual or up to $7 million per couple. The tax is slated to disappear entirely on Jan 1.
But estate planning in 2010 will be complicated by a new twist: a complex tax on capital gains that will affect a broader swath of taxpayers. The estate tax is scheduled to return in 2011 at a 55% rate with an exemption of slightly more than $1 million.
The looming lapse of the estate tax is presenting some families with unprecedented ethical quandaries.
“I’ve been practicing for more than 30 years, and never has the timing of death made such a financial difference,” says Dennis Belcher, president of the American College of Trust and Estate Counsel. “People have a hard enough time talking about death and addressing estate planning without this.”
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The Death of the Death Tax (Or: How to Die in 2010)
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Estate tax set to disappear Friday, reappear in 2011
Surabian: Federal Estate Tax expires tonight
Taxing the Estate Heirs: What’s Fair?
As estate tax drops to zero, Congress should take action
Trusts and estates attorneys advise inaction
Of course, if Congress does nothing to fix this mess, the perverse opposite of what is occurring now will transpire. Instead of keeping loved ones on life support to make it until 2010, when there’s no Federal estate tax, some families will have to decide whether or not to pull the plug on their loved ones in 2010, before the 55% estate tax rate returns in 2011.
/it’s [expletive deleted] like this that drives us estate planning attorneys crazy
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