Beware greedy relatives if you hope to see 2011
Isuppose you’re wondering why I gathered all you distinguished Americans here today. So far you have survived the worst crisis in financial markets since the Great Depression. You have held onto your sizable wealth, which presents us with a tax-planning scenario that only Agatha Christie could have dreamed up: There is a new and possibly significant risk to your continued survival that runs through the end of this year.
You no doubt heard about the death of New York Yankees boss George Steinbrenner last week, and you may know he died at an opportune time for his heirs. Your own children and grandchildren, nieces and nephews probably learned something that could put you in danger.
You see, thanks to a quirk in George W. Bush’s tax cuts in 2001, the estate tax this year, and only this year, is zero. That means if you die in 2010, your heirs pay the government nothing on the money you pass along to them.
But as the saying goes, “no good thing lasts forever,” and the estate tax is coming back with a vengeance. Unless Congress extends the tax cut, starting on Jan. 1 all taxable estates that exceed $1 million will be taxed at the pre-2001 rate of 55 percent.
You heard me right: A federal tax rising from zero to 55 percent as the ball drops in Times Square. Have you ever heard of such a thing?
I investigated whether Congress might act to prevent this crazy, sudden increase, and the perverse incentive that accompanies it, by keeping the death tax dead.
It doesn’t look good. Even if Congress acts, it seems likely to tweak rather than abolish the tax. For instance, Sens. Blanche Lincoln of Arkansas and Jon Kyl of Arizona would restore the estate tax at 44 percent, exempting the first $3.5 million, eventually dropping to 35 percent with a $5 million exemption.
So it seems that, no matter what, the estatetax rate next year is going to be well above today’s goose egg. If you wait to die until 2011, you’re likely to face a tax rate of about 50 percent. That means if your estate is $200 million, your heirs save about $100 million if you, let’s say, conveniently have an accident in the next five months.
I see some of you shaking your heads. I know, this may sound far-fetched. But economic studies have shown that monetary incentives influence death rates. Plugs get unplugged, do-notresuscitate orders are placed. Maybe worse.
I reviewed a 2003 paper in the Review of Statistics and Economics by Joel Slemrod of the University of Michigan and Wojciech Kopczuk of the University of British Columbia. They examined the number of estate-tax returns immediately after changes in the law since 1916 and found that death rates change with the estate tax.
Applying their results in a back-of the envelope calculation, we would anticipate that people with significant estates are roughly 25 percent more likely to die before the tax skyrockets in January.
Pretty scary, huh? Here’s some brighter news.
A good deal of research has found a decrease in deaths in the weeks before major events, such as holidays or major elections, and an increase in deaths afterward. So it’s quite possible that people reach a certain date through the force of their own will to live. This suggests that your own determination to see 2011 might matter more than, say, the possibility that your grandchildren poison you.
Just in case, we have some recommendations to reduce the chances of a spike in mortality among the wealthy this year.
First, if your only heir is your spouse, relax. Your husband or wife can inherit everything without incurring any tax liability this year or next. That part of the tax law is likely to persist no matter what.
If you do have many heirs other than your spouse, then there are a number of candidates who might, in a mystery novel at least, have a motive to do you harm. The challenge is to revise your estate plan to remove any incentives they might have to do so.
One way out would be to remove from your will anyone you don’t really, really trust. But that might create the risk of retribution, and we’re trying to lengthen your life here, not shorten it.
A far better solution is to arrange your affairs so that your heirs stand to get the same amount of money if you die this year or next. Here is a simple way to do it.
Change your will so that if you drop dead this year, the first 50 percent goes to charity. Divide the rest among your heirs. On Jan. 1, have the will revert to its previous conditions. Announce this change to all your heirs, and the problem is solved.
Once this change is made, the only entity with an incentive to see you die this year rather than next year is the charity, and it has no way of knowing what you’ve written in your will.
If your heirs love you, they will be glad to be rid of any incentive to see you die this year. If they don’t love you, you can sleep easier.