Future of the Federal Estate Tax

Taxes as incentives for behavior: "The economy will collapse in 2011" and dying to save taxes

[1] “The economy will collapse in 2011.”

On June 6, 2010 the Wall Street Journal published an op-ed by Aruthur Laffer, Tax Hikes and the 2011 Economic Collapse.  The synopsis provides, “Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.”

The premise of the article is that taxes are an incentive for behavior:

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Laffer is definite regarding the effects that increases in taxes will have on the economy in 2011: “The economy will collapse in 2011.”

In Wealthy Shift Their Income to Avoid Higher Taxes (WSJ Blogs: The Wealth Report, 6/8/10), Robert Frank discusses Laffer’s article.  Frank provides this summary of the article: “In his Wall Street Journal op-ed Monday, famed supply-sider Arthur Laffer argues that higher taxes on the wealthy rarely work because the wealthy simply shift their income.”

[2] Dying to save taxes.

Laffer describes income-shifting as one response to increases in taxes.  With regards to avoiding the federal estate tax, pundits have discussed a bleaker response.

In a May 30, 2001 New York Times op-ed, Reckonings; Bad Heir Day, Paul Krugman suggested that EGTRRA should be called the “Throw Momma from the Train Act of 2001.”

In The Costs of Estate Tax Dithering, 43 Creighton L. Rev. ___ (2010), Paul Caron writes,

Recall the Throw Momma from the Train clip I showed earlier. That is not an idle threat – at least two economics papers have demonstrated that estate tax changes can affect the timing of death.*

* Citing to Wojceich Kopczuk & Joel Slemroad, Dying to Save Taxes: Evidence From Estate-Tax Returns on Death Elasticity, 85:2 REV. OF ECON. & STAT. 256 (2003); Joshua S. Gans & Andrew Leigh, Did the Death of Australian Inheritance Taxes Affect Deaths?, 6:1 J. ECON. ANALYSIS & POL’Y 23 (2006).

NY Times article on billionaire Dan Duncan's legacy: "Death, but No Taxes"

On June 8, 2010, the New York Times published Legacy for One Billionaire: Death, but No Taxes, by David Kocieniewski.  Kocieniewski discusses the legacy that Dan Duncan might leave in dying in March 2010:

A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free. . . .

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent. . . .

The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth

See also my earlier post: Death of billionaire, Dan Duncan, might make a retroactive estate tax less likely (4/15/10).

Death of billionaire, Dan Duncan, might make a retroactive estate tax less likely

Dan Duncan died on Sunday, March 28, 2010, at the age of 77 and was “one of the world’s least-know billionaires.”  Russel Gold & Stephen Miller, From Roughneck Origins to Texas Billionaire (Wall Street Journal, 3/30/10).  Duncan was the co-founder, chairman and majority shareholder of Enterprise Products.  He died with an estate that is estimated to be around $9 billion. 

Duncan died in a year when there currently is no federal estate tax.  Scott Martin cogently states, “Washington lawmakers’ estate tax hiatus has now potentially cost the IRS billions in lost tax collections.”  Billionaire’s Heirs First to Win 2010 Estate Tax Jackpot (The Trust Advisor Blog, 4/10/10).

Martin further informs that “probate gurus” believe that the death of Duncan will make a retroactive estate tax less likely:

Experts say death of Texas billionaire Dan Duncan makes retroactive reinstatement of the death tax less likely because the stakes are now a lot higher.

Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he’d passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there’s no federal estate tax this year, the government gets nothing.

As the first billionaire to die in this year without an estate tax, Duncan presents a tempting opportunity for a revenue-strapped Congress to follow through on threats to reinstate the tax for 2010 and possibly even make it retroactive to the beginning of the year.

However, probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years.

See also

• Gerry W. Beyer, Black Gold Billionaire Dies in 2010, Benefiting from Federal Estate Tax Repeal, Wills, Trusts & Estates Prof Blog (4/1/10).
• Gerry W. Beyer, Big Estates in 2010 May Be an Incentive Against a Retroactive Estate Tax, Wills, Trusts & Estates Prof Blog (4/13/10).
• Joe Carroll and David Wethe, Dan Duncan, Billionaire Philanthropist, Dies at 77 (Update1), BusinessWeek (3/30/10).
• Dan Duncan, Wikipedia.
• Robert Frank, Oil Magnate’s Death Costs U.S. Millions in Foregone Taxes, Wall Street Journal Blogs: The Wealth Report (4/14/10).
• Clifford Krauss, Dan L. Duncan, Oil Billionaire, Dies at 77, New York Times (3/30/10).
• David Shulman, The First Multi-Billionaire Death of 2010: The Year Without an Estate Tax Continues, South Florida Estate Planning Law (4/15/10).
• Casey Wooten, Dan Duncan dies at 77, Houston Business Journal (3/29/10).

(Special thanks to Professor Robert G. Nassau for bringing this news to my attention.)

NYT: talking about estate planning with family members

On March 4, 2010, the New York Times published Estate Planning as a Family Conversation, by Deborah L. Jacobs.  This article demonstrates the importance of talking about estate planning with family members:

Families that speak freely about estate planning can sometimes address awkward situations that might arise, like the choice of the executor . . . or succession plans for a family business or the leaving of assets in trust. . . . 

How families handle delicate issues depends both on the particular circumstances and the personalities involved.

In one story, a daughter discovers that her terminally ill father, a lawyer, did not have an estate plan and that “[w]ithout one, state law in Washington dictates that everything he left behind would go to his wife, from whom he has been separated for 30 years.”  This result is not one that the father wanted: he “decided he would rather have his assets divided between [his] two children”   

Jacobs recounts other stories and relates much advice from experts.  The reader walks away aware of pitfalls that can arise in the family conversation, and is introduced to a few strategies he or she can use to bring up and discuss estate planning. 

As Jacobs describes, such a conversation can be “a gigantic step” for both parents and children.   Writing about Jacobs’s article on Massachusetts Estate Planning and Elder Law blog, Leanna Hamill writes, “any kind of conversation about estate planning is better than none at all.”

Jacobs’s article has been written about by others, including:

• Hahn's Estate Planning Blog
• Wills, Trusts & Estates Prof Blog

I think that a good way to bring up a family conversation about estate planning is to give or share Jacobs’s book on estate planning with your family member.  Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide explains estate planning concepts in terms that are understandable.  It has many useful to-do lists.  This book can make the family conversation easier because it places the focus on what can be done right now. 

NYT: two articles by Deborah L. Jacobs give practical advice in uncertain times

On February 17, 2010, the New York Times published two articles, by Deborah L. Jacobs (lawyer, award winning journalist, book author) in the Estate Planning section:

• Saying ‘No Thanks’ to a Bequest
• Estate Tax’s Unclear Fate Challenges Heirs

The first article is for people who are planning, and the other is for survivors.  These articles can be read together.  Jacobs said, “I wish the lawmakers would read them as a pair and think about all the trouble their inaction is causing on both sides of the equation.” 

* * *

Disclaimers: One Way to Plan an Estate in Uncertain Certain Times

In Saying ‘No Thanks’ to a Bequest, Jacobs discusses using disclaimers in estate planning. 

Disclaimers Provide Flexibility

Especially in uncertain times, disclaimers can be useful because they provide flexibility:

TURNING down an inheritance may seem to be an alien concept. But with the estate tax in flux, this process, called disclaiming, can provide needed flexibility.

People who disclaim are generally treated as if they had died before the person from whom they are inheriting. The assets then go to the individual or trust next in line under the estate plan. Or, if the plan makes no such provision, assets are distributed according to state law.

Some attorneys like using disclaimers.  Jacobs quotes Joshua Rubenstein, who highlights positive aspects of disclaimers:

In this environment, “using disclaimers is like playing checkers with your fingers still on the piece,” said Joshua S. Rubenstein, a lawyer with Katten Muchin Rosenman in New York, in reference to a technique that allows you to try a move and then take it back. . . .

By anticipating the possibility of a disclaimer, “you don’t have to be a soothsayer at the time you do your documents,” Mr. Rubenstein said, adding, “Your spouse can wait and see what happens.”

Jacobs informs that using disclaimers can avoid the problems caused by formula clauses:

The problems that disclaimers can solve stem in large part from the use of formula clauses, in which lawyers use phrases like “that portion” or “that amount” in documents allocating money among heirs or trusts.

Attorneys who use disclaimers have told me that the estate plans they drafted do not present problems in 2010. 

Downsides to Using Disclaimers

Not all estate planners like to use disclaimers.  In fact, some only resort to them if circumstances necessitate it. 

Jacobs highlights potential problems with disclaimers:

• “Heirs must disclaim within nine months of your death, and it may be difficult to make this financial decision during a time of grief"
• “someone who disclaims cannot have accepted an interest in the asset or any of its benefits”

In a blog post -- Using a Disclaimer to Deal with Estate Tax Uncertainty (Wills, Trusts & Estates Prof Blog, 2/19/10) -- reporting about Jacobs’s article, Prof. Gerry Beyer highlights yet another potential pitfall with disclaimers:

There is substantial risk in using the disclaimer approach, however, because it is possible the surviving spouse . . . will not comply with the statutory requirements for an effective disclaimer or the spouse will become greedy and choose not to honor their promise to disclaim.

Jacobs closes her article by relating a joke that captures this problem:

Skeptical colleagues joke about the five-word lie spouses routinely tell each other when they prepare their estate plans: “Honey, I promise to disclaim.”

* * *

What Heirs Can Do in Uncertain Times

In Estate Tax’s Unclear Fate Challenges Heirs, Jacobs highlights some of the challenges that heirs face in 2010.  Then, she discusses four strategies that heirs should consider in 2010:

• delay selling depreciated assets
• segregate living expenses
• postpone receipt of some benefits
• locate investment records

* * *

As you can tell from reading her articles, Jacobs is talented in conveying complicated concepts in understandable, yet accurate, terms.  In addition to writing many helpful articles, Jacobs is also the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  I gave a brief review of this book in an earlier post: Excellent book: Estate Planning Smarts, by Deborah L. Jacobs (12/24/09).  For more information, see http://estateplanningsmarts.com/

Deborah L. Jacobs: practitioners must confront the estate tax crisis

I have been writing about a dilemma practitioners are facing.  On one had, some are taking a wait-and-see approach because of the uncertainty in the law.  See NYT: planning is difficult when rules are uncertain (2/13/10).  On the other hand, some are taking a proactive approach.  See WSJ article promotes review of estate plans (2/11/10).

In a February 14, 2010 article, which was published in Investment News, Deborah L. Jacobs (lawyer, award winning journalist, book author) gives an imperative: The estate tax crisis must be confronted.  The synopsis provides, “Don't wait for Congress to act -- help clients prevent hefty IRS bills by updating wills and trusts.”

Jacobs provides two ways in which estate planners can “provide damage control” and help their clients:

• “First, help clients organize their records to show the cost basis of assets they might ultimately inherit.”
• “Second, encourage clients to look over their wills and living trusts to check for phrases such as ‘that portion,’ ‘that fraction’ or ‘that amount.’”

Jacobs reviews the problems with formula clauses when there is no federal estate tax.  She writes that, “the lawyer who initially wrote the document may be able to fix the problem with a simple amendment. Assuming these are the only changes the client is making, the legal fee should be minimal.”

The closing sentence in the article is one all practitioners should take to heart: “By helping clients navigate potential pitfalls while the tax system is in flux, you reinforce your role as a trusted adviser.”

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  I gave a brief review of this book in an earlier post: Excellent book: Estate Planning Smarts, by Deborah L. Jacobs (12/24/09). 

More sample client letters

On January 5, 2010, I provided a link to a sample client letter found on InterActive Legal.  See Sample letter from Jonathan Blattmachr.  Here are links to two more:

• Derek W. Jensen, Client Letter on Estate Tax Planning in 2010, Jensen Law Office, Jan. 22, 2010.
• Charles Rubin, Estate Tax Repeal and Your Estate Planning Documents, Rubin on Tax, Feb. 14, 2010.

All of the letters educate clients about the current law and uncertainties surrounding the law.  Then, they invite clients to have their estate plans reviewed. 

The letter from Interactive Legal sprinkles the invitation to the client throughout the letter:

However, a change in the tax law that has just become effective and will last only for this year suggests that it may be appropriate for you come in and visit us to see if your documents should be modified. . . .

It may be appropriate for your documents to be revised in order to take into account the possibility of carry over basis.

Therefore, we think it is important for you to consider coming in and discussing these matter with us.

Jensen’s invitation comes at the end of the letter.  I like how it emphasizes the novelty of the current situation and the expertise of Jensen’s firm:

What Should You Do?

We encourage you to meet with us as soon as possible to review your estate plan and make any changes that are necessary for this law. We need now to ensure that your property is positioned to receive the maximum step-up in basis increase available under current law. This is a time that demands a new approach to your planning with new thinking and building in flexibility to see that your wishes are fulfilled no matter what Congress will throw at us this year or next. We have solutions that will meet you planning objectives with the least amount of tax impact.

Unlike the previous, Rubin’s letter also discusses state estate tax exposure.  It invites clients for a review after indicating that most estate plans will not need to be corrected:

Most situations will probably not need any corrective action. Further, if the testator survives until 2011 when the estate tax is restored, the 2010 issues go away on December 31, 2010.

Nonetheless, it is usually a good idea to have your estate planning documents reviewed each year for changes in the law, family situations, assets, business circumstances, and other changed  facts. Most firms, like our firm, do not undertake a continued client relationship that includes a duty to advise clients of changes in the law that affect their situation, given the impossibility of that task due to the volume of documents, changes in lawyer personnel, and regular changes in the law.

Therefore, we recommend that you give consideration to having your documents reviewed by your estate planning professionals, both for 2010 issues and for an overall review of your situation.

So, there are a number of ways to convey the same message: clients should have their estate planning documents reviewed.  Note that this approach has received support in popular media.  See WSJ article promotes review of estate plans (2/11/10).  But not everyone agrees.  Some are advocating taking a wait-and-see approach.  See NYT: planning is difficult when rules are uncertain (2/13/10).

NYT article examines the fog surrounding the federal estate tax

On February 13, 2010, the New York Times published That Fog Still Hasn’t Lifted From the Estate Tax, by Conrad de Aenlle.  This article appears in the “Your Taxes” section of the NYT.  Here are the opening paragraphs:

THE estate tax isn’t dead. It’s resting.

The tax has been eliminated for 2010, but the estates of people who die before the year is out may still not pass free and clear to their heirs. The complexities of the tax system and the likely return of the estate tax next year — maybe even sooner — are creating confusion for accountants, lawyers and many families.

Possibly greater expense, too, and not just for the wealthy. Odd as it may seem, tax specialists caution, the absence of an estate tax could result in greater liability on smaller fortunes than on bigger ones.

This article is similar to a Wall Street Journal article published today.  See WSJ: estate tax repeal could raise taxes for some (2/13/10).

Glib NYT essay, “This Year, the Tax Code Is My Friend”

On February 13, 2010, the New York Times published This Year, the Tax Code Is My Friend, by John Schwartz.  The essay takes a light approach to serious topics. 

For example, Schwartz tries to give a positive spin to selling stocks at a substantial loss.  Because he had to pay for a child’s surgery that was not covered by life insurance, Schwartz had to sell shares of stock that he bought for a little over $40 for just $5 a share.  He writes,

That might sound pretty grim. But the tax code is helping to turn that frown upside down. It allows me to use $3,000 of capital losses to offset ordinary income, and the rest can help defray capital gains from profitable stock sales in the next few years. So those losses are a gift that keeps on giving. If I had any assets to sell at a profit, it would truly be great news.

With regards to the federal estate tax, Schwartz is just as smart:

The most amazing example of bad news turning into good comes in the form of taxes’ old partner: death. Normally, death is about the worst thing you can think of. But even the Reaper has an upside this year, thanks to the glories of the tax code. Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax disappears this year. Gone. Poof. Unless Congress extends the law, however, the estate tax will return on Jan. 1, 2011.

That means the estate of anyone who dies after Dec. 31 this year will be subject to the old estate taxes. Now there’s a law that puts the “dead” in deadline.

It turns out that there were death panels after all — but instead of health care bureaucrats, they’re made up of I.R.S. agents and tax advisers.

Yet this is good news, too. If the worst happens this year, there’s a golden lining for your heirs. And no matter what happens, it’s going to be a year when people have a special reason to be very, very nice to their children. Family harmony is a good thing.

I suppose that some might find Schwartz’s essay entertaining. 

NYT: planning is difficult when rules are uncertain

On February 13, 2010, the New York Times published With Rules in Flux, It’s a Tough Time for Tax Strategies, by Robert D. Hershey, Jr.  The article explains that there is much uncertainty surrounding the federal estate tax:

A big immediate hang-up is the unresolved status of the estate tax . . .

“I don’t think there’s anything more significant than the estate tax,” said Catharine V. Fairley, a tax planner and partner at Draper & McGinley in Frederick, Md., citing its wide implications for wills, gifts and trusts. “No one saw this coming — that they let the estate tax sunset.” . . .

WITH the demise of the estate tax on Dec. 31, 2009, planning has become “a nightmare,” Ms. Fairley said. “It’s just limbo,” she added, until the government decides what to do about restoring the tax, which Democrats have said they support and which directly affects the existing gift tax and the way the capital gains tax is levied.

“You have to wait and see” what happens, said Robert J. DiQuollo, president of Brinton Eaton Wealth Advisors in Madison, N.J. He noted the possibility of a drawn-out constitutional challenge if the estate tax were to be brought back retroactively to, say, Jan. 1.

While those who sought abolition of the estate tax say it is unlikely that its repeal will be permanent, supporters of the tax don’t imagine that the exemption amount and rate will revert to the levels of 2001 — $1 million and 55 percent — when a convoluted phase-out was enacted.

“Politically, that’s not feasible,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.

Contrast the wait and see approach quoted in this article with the approach provided in a Wall Street Journal article earlier in the week: WSJ article promotes review of estate plans (2/11/10).