2010: The best year to die?

By Jeff Schnepper

My kids had just sat me down and given me the bad news: I was going to die. They couldn't tell me what was going to do me in. But I was clearly a goner.

The only thing they could guarantee was the year: 2010. Anytime during the year was OK with them. And they would be financially, if not emotionally, devastated if I was still around Jan. 1, 2011.

Not that they don't care for me. "It's not personal, Dad," my son Josh said. "It's just business -- good tax planning."

It's the first time in 30 years they've paid attention, and now I'm scheduled for a nondeductible chariot ride into the sky.

They must have read my chapter on the Economic Growth and Tax Relief Reconciliation Act of 2001. That's the bill in which then-President George W. Bush and Congress slashed income and estate tax rates.

The amount of assets that escaped federal estate taxation increased from $675,000 in 2001 to $3.5 million in 2009. That's in addition to anything left to a spouse. Rates dropped from a maximum of 55% in 2001 to a maximum of 45% this year.

The best part was scheduled for 2010. The then-Republican-controlled Congress decided that the heirs of anybody who died during 2010 would pay zero in estate tax!

But on Jan. 1, 2011, the estate tax exclusion reverts back to $1 million, and the maximum rate climbs back to 55%.

I agree this is crazy. Especially because what the Republicans wanted to do back then was to kill the estate tax.

But they couldn't eliminate the tax because that would have required disclosing that the law would have cut government revenue by far more than the $1.4 trillion the law's supporters claimed.

To get around that inconvenient problem and not have to win a larger majority to comply with the provisions of the Congressional Budget Act of 1974, the tax writers had to say that all provisions of the tax law would expire and revert to old tax law -- assuming they'd be extended somehow. (And it was stated that way at the time.)

But lawmakers haven't extended the 2001 law yet, and the Republicans no longer control Congress.

Good tax planning

No wonder my kids want me to exit in 2010. It's a tax freedom year for them.

So, crank up the heart and lung machines. Keeping those with huge taxable estates alive until Jan. 1, 2010, could be worth big bucks to their beneficiaries. A zero tax on a $10 million estate would save those heirs about $5 million.

But if you're still hanging on after Christmas 2010, watch out. You're probably not going to make it into 2011, when we're scheduled to go back to the rules under the pre-2001 tax law.

The first breath you take on New Year's Day 2011 could cost your beneficiaries many millions in increased federal estate taxes.

I gave my wife, Barbara, a living will and health care proxy in case I can't make appropriate care decisions for myself. She now informs me that the 2001 law requires (at least in 2010) the invocation of "do not resuscitate" provisions for anything more than a hangnail. I must have missed that page.

I'm not being at all facetious that these sorts of calculations, as morbid as they may sound, will be made by a great many people.

In fact, in the 2001 paper "Dying to Save Taxes" (.pdf file), economists Joel Slemrod of the University of Michigan and Wojciech Kopczuk of the University of British Columbia studied 13 changes in the U.S. tax code from 1917 forward. They concluded that taxpayers died in greater numbers just before tax increases and just after tax cuts.

Video: Jeff Schnepper on landing a good estate planner

A 2006 study in Australia reached the same conclusion. More than half of those who ordinarily died in the week before the abolishment of the Australian inheritance tax survived into the next month and escaped with their estates untaxed.

Where there's a will, there's a beneficiary with a lawyer trying to trim the potential hurt.

What Congress will do

Sorry, but much of the above is little more than me having fun.

It may feel good, but none of it is likely to happen.

There's no way Congress wants an unlimited estate tax exclusion to go into effect. I expect to see changes come out before the end of 2009 that President Barack Obama will sign.

Although Republicans want to kill the estate tax, what they call the "death tax," their fallback position is to create a $5 million exclusion and a 35% top rate.

That would eliminate the federal estate tax for married couples with estates worth up to $10 million, if their wills were drafted with the appropriate special credit shelter/exclusion trusts.

Democrats are willing to continue the $3.5 million exclusion after this year. They also want an automatic credit for the estate of the surviving spouse for any exclusion not used by the first to die. Under current law, each spouse has a $3.5 million exclusion. But if 100% of the estate is left to a surviving spouse, the decedent's $3.5 million exclusion is lost. Allowing the surviving spouse to exclude any amount not used by the first to die would end the need for trusts and exclude a minimum of $7 million from the combined marital estate.

In case anybody missed the last election, Democrats have a majority in both chambers of Congress. At a minimum, the unlimited exclusion for 2010 probably will be replaced by an extension of this year's $3.5 million exclusion, with a 45% maximum rate. Those figures are expected to be extended into 2011 as well -- at least until Congress changes the law once again.

So Josh, any chance of my staying around a bit longer? I promise not to spend too much . . .

Published Oct. 1, 2009