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, levied at death, 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."
Congress could pass an estate tax next year and make it retroactive to Jan. 1. Whether that would withstand a court challenge is a subject of debate in the estate-planning world. In the past, when Congress has passed retroactive laws, congressional leaders often issued formal statements of intent in advance.
That hasn't happened this time. The main statement has been a verbal one by Senator Max Baucus (D., Mont.) on the floor of the Senate, not a joint declaration by leaders from both parties.
In addition, the composition of the Supreme Court has changed, and some financial advisers believe the court might not again bless a retroactive law. "People with the means to fight against a retroactive law will die, and someone will challenge it and we might not know the answer for years," Mr. Belcher says.
As part of the changes taking effect in January, Congress also dramatically lowered the taxes on gifts to grandchildren. But all the uncertainties -- Will the law be changed? Will it be retroactive? -- are forcing family legal advisers to craft various provisional financial-planning strategies that can be undone later if the rules do change.
The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it's legal, might allow his estate to dodge the tax.
His answer: Yes.