Howard Gleckman of TaxVox wrote a blog post last week titled Throw Momma from the Train and said this:
There may be no provision in tax law more bizarre than the estate tax. In just a year and a few days, on Jan. 1, 2010, the levy will expire and estates of any size will be passed on tax-free. A year after that, the tax will return with a vengeance. Uncle Sam will take 55 percent of assets of more than $1 million.
Gleckman illustrates by example the morbid tax planning tactics that may ensue because of this desultory tax:
Imagine your Aunt Sue had the good fortune to miss out on that tea with Bernie Madoff and has $5 million. If Sue dies within the next couple of weeks, her estate will owe about $1.35 million in taxes (it would pay a 45 percent rate after exempting the first $2 million). However, if she hangs on though midnight of New Year’s Eve, the exemption will rise to $3.5 million and her estate tax will shrink to just $675,000. (Btw, these are rough estimates. There are special breaks for farmers and small businesses, gift tax rules, and many other deductions).
Now, fast forward a year. Sue still has her $5 million (those laddered T-bills were a pretty good idea after all). If she dies a year from today, her estate will still owe $675,000. If she lives for just a few more days, to Jan.1, 2010, it will pay nothing.
Here is where the story becomes truly grisly. If Sue dies at 11:59 PM on Dec. 31, 2010, her $5 million will pass to her heirs tax-free. If, however, she dies 2 minutes later, her estate will owe $2.045 million in tax because the law will revert to an exemption of just $1 million and a top rate of 55 percent. Estates are also subject to new capital gains rules for 2010 only. Now you know why it is called the “throw momma from the train” tax.
Author’s Caveat: There are a lot of wealthy old folks out there who need to be very careful in 2010 before drinking or eating anything given to them by their heirs. And for those rich folks with a living will, if you are in a vegetative state at the end of 2009 it is unlikely that your health care surrogate and the sole heir to your fortune will be enthusiastic about granting your wishes and pulling the plug.
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1 House Votes for Permanent Extension of 45% Estate Tax // Dec 3, 2009 at 5:55 pm
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