Rich Cling To Life To Beat Tax Man is the title of a piece in The Wall Street Journal on December 30, arguing that the lapse in the US Federal estate tax law in 2010 is causing wealthy Americans to make decisions about when and how they should die. Other copies can be found here and here. This article has prompted a flurry of comment both in the media and among estate tax experts, including a number of quite excellent will and estate lawyers in the United States, some of whom are friends and colleagues of mine.
The issue involves the minimum level at which estates are exempted from tax. Years ago (in 2001), the United States Congress provided for a different exemption level each year, rising to US $3.5 million per estate in 2009, and then no estate tax at all in 2010! For technical reasons the legislation had an effective life of only ten years. After 2010, the exemption would fall back to $1 million and the rate of estate tax would be higher. That is, where the maximum tax is 45% in 2009 and zero in 2010, it raises to 55% in 2011.
To favor their heirs, some clients are putting provisions in their health care directives or living wills allowing the person chosen to make end of life decisions (for example, do not resuscitate decisions) to consider the effect of estate tax changes. Of course, this is not something that Congress ever imagined, but the many opportunities to extend or revive the estate tax have been ignored, so the tax is due to lapse in 2010. Because this is impacted by the different social and public policy views of the two major political parties, there is little reason to expect that a concensus will be readily achieved.
On top of this is a new, more complex tax of capital gains that will affect more taxpayers. Will Congress step forward to sort this out? Will it apply corrections retroactively?
Comments from estate planning lawyers and tax experts vary. I'll mention a few. Kelly Phillips Erb, who blogs as The Tax Girl, says that although everyone expected the tax law to be revised before this, “Quite frankly, if it doesn’t change (or maybe even if it does) I'm interested to see how many malpractice cases will be filed against attorneys who either drafted inflexible documents or didn’t advise of the consequences. I sense that it's going to be ugly.”
David Hiersekorn of the Newport Legacy Group in Newport Beach. CA says “I am about 95 percent sure that congress will retroactively reinstate the estate tax early in 2010. Retro to 1/1/10. The unlimited deduction will not survive. My prediction is that they will extend it one year and then let it sunset back to $1 million in 2011.” Others guess that the estate tax exemption will be made permanent at $3.5 million.
David Shulman in Florida has blogged here on the danger of not reexamining existing estate plans, which may have quite harmful language and unintended impacts on heirs. His example is somewhat technical, so I will not repeat it here, but his point that one should review older documents is quite important.
Neal Kennedy in Texas, found at http://www.kennedylaw.com, sees no real incentive for those in Congress with differing views on the estate tax to reach any compromise agreement. Thus he suspects that the exemption at $1 million that will come back in effect in 2011 will continue after that.
Note the points relevant to most clients, especially those in Japan. First, the above dispute concerns only fairly rich persons with large estates, those above $3.5 million for an individual, $7 million for two spouses.
Second, nobody really knows what Congress will do. While it is human nature to delay action in order to see what happens, avoiding uncertainty about the level of estate tax is not a reason to neglect planning about what happens to your assets and who will take care of your family. Tax is only one factor to be considered, and a minor one for most of us. In the U.S. each year, only about 5,500 estates are larger than those figures. It is true that the Federal government raised about $29 billion in estate and gift taxes in 2008, but that still does not affect most of us. For those with very large estates, it can be assumed that they mostly have good estate plans, trusts, generation skipping, charitable plans, etc. and they will tweak them to fit changing laws. They will do fine. It is the others that is the greater concern. In practical terms, anyone with more than a total of $1 million in assets, including life insurance, real estate, etc., should really take another look at their estate plan because of the possibility of retroactive application of tax in 2010.
Third, regardless of Federal estate tax, one must also consider the laws of various States that provide for their own estate taxes, gift taxes, exemptions for homestead and other factors, as well as the taxes and inheritance laws of Japan and other nations where one may have assets or heirs. Advance planning can greatly simplify distribution at death and reduce costs in a variety of ways. Transfers into trusts, gifts to intended heirs, charitable distributions, etc. can be included in such plans, so there are many advantages to good planning and little benefit from delay.
In Japan, most persons do not have wills and tend to accept that intestate (no will) distribution can be made according to government laws. Sadly, there seems to be little recognition of just how many problems can be avoided with good planning and documentation. For example, family disputes over estate distribution can be avoided or minimized. Proper succession planning can maximize the benefits of family-owned businesses and assure that both one's family and the business prosper. Assets that bear higher taxes can be sold and turned to better uses. Plans to help future generations, as through financing higher education, can be established.
Speaking personally, I'd like to take some assets with me. Since I know I cannot, I would like to make sure that my family will prosper and get the benefit of my work, rather than having my assets go without a proper plan to some government tax authority or to the wrong heirs. I would hope that others share these views.