No one expected it to come to this.
Sure, 2010 was going to be the year of the Roth conversion. Congress created that loophole on purpose, hoping that they’d get a huge tax windfall from rich folks rushing to convert. But now, after economists and financial planners spent the whole year predicting otherwise, Congress is also letting the estate tax completely expire, if only for one year.
I’m no fan of taxes. Heck, I might be the beneficiary of an estate one day. But killing the estate tax for one year—it comes back in full force in 2011—creates from pretty perverse incentives.
Exhibit A: From the Wall Street Journal:
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.
Exhibit B: Quoth Congressman Richard E. Neal in the New York Times when asked about the expiration: “If you’re at the checkout counter, you might want to expedite things.”
Ah, humor! Neal is no doubt trying to be glib. It’s a great quote. But let’s see how funny this is for our euthanasia man.
Uncle Ed has an estate worth $10 million. If he died in 2009, his heirs would have walked away with just over $7 million, give or take (some estate planning attorneys are better than others). If he dies in 2010, his heirs get pretty much the whole $10 million.
If he dies in 2011? His heirs get…wait for it…$5.2 million. (Note: This is all based on the estate tax tables at Dinkytown and doesn’t include state taxes.)
Being a multimillionaire, Ed’s been getting cutting edge cancer treatment. His doc thinks it could add two or three years to his life. But now Congress is making him calculate exactly how much that life is worth.
Is it worth $4.8 million? He could put all his grandchildren through college with that money. His daughter could make a downpayment on a new house. That money could last and be enjoyed years and years after Ed’s passed.
On the other hand, his kids would have to live with the knowledge that their father (or uncle, in this case) sacrificed the end of his life for money. That’s the plot of a Stephen King mind trip if there ever was one.
Most estate planning experts expected Congress to fix the hole and bring the estate tax exemption and rates to somewhere between this year’s windfall and next year’s punishment, but instead, the parties got distracted by other matters and never reached a compromise. Now, some congressmen vow to pass a law that retroactively treats the estates of people who die in 2010 as if they had died in 2009. From the WSJ: Congressman Neal said “there is no question” that Congress will reinstate the tax, retroactively to Jan. 1, early next year.
The Supreme Court has let a law apply retroactively before. But can you imagine them letting it fly on this? Uncle Ed declines cancer treatment, dies, and is heavily taxed anyway. Thanks Congress. From Congressman Neal again, who chairs the House Select Revenue Subcommittee: “Ten years ago, there was a lot of gallows humor about repeal when everybody said it would never happen. Now, one of those never-happen moments has happened, and nobody’s laughing.”
And yes, that’s the guy who just told those at the “checkout counter” to “expedite things”.
So what do you do about it?
You can’t help Congress being ludicrous. That’s a fact of life. But there are several things you can do to lower the tax burden on your estate no matter how Congress tries to both confuse its citizenry (and warp the laws of time and space). Lets get started.
1. Give generously.
As they did last year, the IRS will allow you to give up to $13,000 to any number of recipients tax free. So, as soon as you’re sure that you’re going to have an estate to leave, start whittling it down early by giving the max to your heirs every year. You’ll also avoid the tax if you give less than $1 million total to that heir over your lifetime. If you exhaust that credit and your gift exceeds $13,000 in 2010, the excess will be taxed at a top rate of 35%.
2. Give the gift of an education
Know what else isn’t taxed? Funding your heir’s college expenses. You could set up a 529 and stick the money in there, but it will be subject to the same gift tax noted above. Instead, if the timing’s right, pay your heir’s college tuition directly to the school. Direct payment of tuition expenses doesn’t count as a gift (though room, board, and all those other college-related goodies count).
3. Hire a good estate tax attorney.
For the uber-rich, there’s really no getting around this. Most estates don’t get hit with an estate tax. I mean, how many of us die with several million in the bank? But if Congress decides to bring back the estate tax exemption at $1 million, which it’s currently scheduled to do, a lot more of us could be sweating through complicated tax laws. The key word here though is “good”. Money Magazine recommends the guys over at the American Academy of Estate Planning Attorneys. To me, they look a bit like a marketing network. I like this search of the National Association of Estate Planners and Councils that lets you find attorneys with CPA, CFP, and other designations you might need depending on how complicated your estate is.