Be­ware greedy relatives if you hope to see 2011

Austin American-Statesman - - OPINION -

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.

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