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Tax tip: Die this year

To the list of the absurd becoming ordinary we can now add the idea that richer Americans should arrange to die in 2010 to save on estate taxes.

By Karen Datko Jul 13, 2010 7:14PM

This guest post comes from Frank Curmudgeon at Bad Money Advice.

 

I am always amused by things that started as a mocking joke but then, through repetition, slowly became unfunny enough that they were taken seriously. The word "software," once used derisively by engineers who built actual electronics to refer to the work of their programmer counterparts, is a good example. Daylight saving time, first proposed in a satirical essay by Ben Franklin in 1784, is another.

 

To this list of the absurd becoming ordinary we can now add the idea that richer Americans should arrange to die in 2010 to save on estate taxes.

 

In May 2008 The Wall Street Journal ran an article with the eye-catching title of "Death by taxes: Seniors may plan their demises to maximize their bequests." But the author made clear his humorous intent in the opening paragraph.

A few weeks ago, I gave a talk about tax policy to a group of elderly people at a ritzy country club in Jupiter Island, Fla. I reminded the audience that the estate tax is scheduled to fall from 45% today to zero in 2010, but then rise all the way up to 55% in 2011. I joked that what we have here is the "Throw Mama From the Train Tax." I even playfully surmised that by this time next year, when kids visit the nursing home they'll be pleading: "Come on, Grandma, hold on for just a few more months." But then in late 2010 it will be the opposite: Heirs will be disconnecting their parents or grandparents from life support or slipping arsenic in their Vodka Tonics.

OK, so it's not exactly Wodehouse. But in the summer of 2008 the idea that a person might time their death to minimize estate taxes was still, at worst, an exaggeration for effect.

 

Partly, this might have been due to the belief that an estate tax rate that went from 45% in 2009, to zero in 2010, and then to 55% in 2011, was itself amusingly absurd and very unlikely to actually happen, no matter what existing laws said. The Democrats who took control of Washington, D.C., in 2008 said that they would repeal this oddity, and to just about everybody this seemed like a no-brainer. (Indeed, I have a hard time believing that very many politicians who voted for this back in 2001 thought it would actually happen.)

As late as Christmas Day 2009, when The New York Times got into the holiday spirit with "Thinking hard about retirement and death," commenters were still speaking of "legislative uncertainty" and warning that "the wealthy should not get their hopes up for an end to the estate tax." Even in the closing days of 2009, the assumption was that Congress would pass something early in the new year that would be in force retroactively to Jan. 1.

 

Well, it's mid-July now and it is quite clear that Congress will do nothing. So the once jokey 45%-0%-55% plan is for real after all. And with it, the idea that this is a good time to kick the bucket becomes, at least to some writers, a reasonable and sober strategy.

Last weekend, the WSJ brought us "Too rich to live?," illustrated with a photo of an older guy standing in a cemetery and subtitled "The estate tax is set to come roaring back in January. That sets the stage for a perverse calculus: End it all -- or leave a massive bill for your heirs to deal with." The older guy is quoted saying, "You don't know whether to commit suicide or just go on living and working."

Advisers say the estate-tax dilemma is especially awkward for heirs. "At least in December 2009, people wanted to keep their relatives alive," says Ronald Aucutt, an estate-tax attorney with McGuire Woods in the Washington area. Now he and others are worried that heirs may be tempted to pull plugs on Dec. 31. Economists might call the taking of a life to reap a tax advantage a "perverse incentive." District attorneys might call it homicide.

Seriously? Rich folks will be ending it all and/or be done in by their heirs come December to save on taxes? I am a big believer in the behavior-changing effects of monetary incentives, but really now. Yes, there will be a few such cases, all of which will, no doubt, be widely reported, but this is hardly an important new trend worth discussing.

If asked directly, I would say that I am against the estate tax, although repealing it is pretty far from the top of my list of priorities. As a matter of policy and philosophy I am uncomfortable with any tax that falls, and falls pretty heavily, on such a miniscule slice of the population. And although it achieves its soak-the-rich goal in a general sense, in practice it is fairly arbitrary, taxing mostly the estates of those who did not spend enough time with lawyers and accountants. So the estate of the 45-year-old hit by a bus leaving young children is hit more heavily than the estate of the 90-year-old with retired children who spent decades arranging his affairs appropriately.

And the $25 billion raised from the tax in 2008 is a great sum of money in any context other than the federal budget. Within that world, it is a rounding error, amounting to about one half of 1% of expenditures. Given how much effort even the modestly rich (as of January 2011 the tax kicks in at $1 million) put into schemes to minimize its effect, I think the whole thing is just not worth the bother.

I am tempted to pile onto my argument against estate taxes by pointing out the many deaths that will be encouraged or even caused by next year's increase in rates. But I can't do that. I just can't say it without giggling.

 

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