How to Avoid Estate Taxes: It's Easy This Year

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Last updated on July 25, 2019 Comments: 8

In most years, only 0.3 percent of those who pass their estates to heirs upon their death end up leaving those heirs with a tax bill. Thanks to exceptions, credits, and thresholds, even the very wealthy can avoid the estate tax. This year is a special year, however. As of today and unless the law is changed, anyone who dies in 2010 is guaranteed to owe no federal estate taxes; this tax has been repealed for just this year.

Last year I considered whether this one-year break would encourage families to keep their loved ones on life support until January 1, 2010 or to encourage passing before January 1, 2011. I wasn’t the only one. A study from Columbia University found the following based on data from other estate tax law changes throughout the last century:

There is abundant evidence that some people will themselves to survive in order to live through a momentous event. Evidence from estate-tax returns suggests that some people will themselves to survive a bit longer if it will enrich their heirs. To be sure, the evidence is not overwhelming. Nevertheless, our central estimate is that, for individuals dying within two weeks of a tax reform, a $10,000 potential tax saving (using 2000 dollars) increases the probability of dying in the lower-tax regime by 1.6%. That there is any effect at all adds to the large body of evidence that taxes affect behavior, and particularly the timing of behavior, including activities such as marriage and childbearing, which are not generally thought to respond to financial incentives.

We cannot rule out that what we have uncovered is not a real death elasticity, but instead ex post doctoring of the reported date of death to save on taxes. Even in that case, this exercise provides evidence on how the attempt to collect taxes can engender resource-using avoidance responses that reduce tax revenue.

Changes in the law encourage people either to optimize time of death or to report death at the optimal time. This may not be the case for Dan L. Duncan, the first billionaire whose heirs will owe no estate taxes on their inheritance. Because Congress didn’t close this one-year reprieve, the Treasury stands to miss billions of dollars in income, some from Dan and some from other very wealthy individuals, that would have otherwise been collected.

Some charities and other non-profit organizations may feel a side-effect from this year’s exemption. Charitable giving is often a part of estate planning, and one goal of estate planning is to reduce tax liability. Charity has the benefit of being a good deed and sheltering wealth from taxes. If there are no estate taxes to avoid this year, there will certainly be estate planners who decide to pass all income to heirs rather than distributing wealth to needy organizations.

Legacy for One Billionaire: Death, but No Taxes, David Kocieniewski, New York Times, June 8, 2010

Article comments

Anonymous says:

It’s also important to note that Dan (the billionaire in the article) does NOT pass his estate on completely tax free. In fact there will be capital gains taxes due it will just be 15% of the full value (since he started the business so there is very little cost basis) vs 45% of everything over $3.5 million (or $7 million including your spouse). Dan’s wife is still alive so the government will still get a big slice when she dies. I wouldn’t surprised to see Congress try an institute a retroactive estate tax for this year. I say try because now with someone with this kind of money passing away there will presumably be plenty of legal action.

One thing to note is the biggest losers in this deal are the people that are just under the $3.5 million ($7 millions including spouse) levels because where they where exempt last year this year they could be taxed 15% on the full amount which could end up costing a husband and wife over $1 million.

Anonymous says:

I recall that nine years ago when the law repealing the estate tax was originally passed it was almost universally considered inconceivable that congress wouldn’t ultimately amend it so that there was not a single year with no estate tax, with the following year the estate tax returning to its original level. Now it looks quite possible that precisely that will happen.

It’s a good lesson to keep in mind: what looks politically impossible at one point in time can change much quicker than we think.

Anonymous says:

Lost in much of this discussion is that many states also have estate taxes, including New York, New Jersey, Mass and Virginia.

Anonymous says:

Optimize time of death!? Stupid humans.