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Death and taxes

Scott Jagow Dec 30, 2009

The estate tax expires at midnight tomorrow night, and according to the Wall Street Journal, some wealthy people on death’s doorstep are trying to hang on until it does.

From the Journal:

Starting Jan. 1, the estate tax — which can erase nearly half of a wealthy person’s estate — goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life’s most trying episodes only more complex.

“I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days,” says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. “Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?”

Well, in some cases, yes, people are ensuring that those decisions will take the tax into account:

To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. “We have done this at least a dozen times, and have gotten more calls recently,” says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.

Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.

“Whenever he wakes up,” says his lawyer, “He says: ‘What day is it? Is it Jan. 1 yet?'”

Now, the question is, what happens at the end of 2010? The estate tax is scheduled to start up again January 1, 2011, and it will include a lot more people. Right now, the tax only applies to about 5,500 taxpayers a year. There are exemptions for individual estates up to $3.5 million and $7 million for couples. But in 2011, the tax will be 55%, and the exemption will only be about $1 million. That includes all of a person’s assets.

So, will we see families frantically pulling the plug December 31st next year? This is an awfully sticky wicket. It’s not clear why Congress let the estate tax lapse for one year. It’s also not clear what happens if Congress decides to pass it in 2010 and make it retroactive. That might be a tough sell in the courts, and it’s probably unlikely. Then again, many were shocked that the tax was dropped in the first place:

Estate-tax experts didn’t expect Congress to allow the tax to lapse, and are flabbergasted that it is actually happening. “All fall when I gave speeches, I said I was willing to bet anyone in the room $10 that we would have an estate-tax extension by the end of the year,” says Thomas Ochsenschlager, head of taxes for the American Institute of CPAs. “Thank goodness I didn’t have any takers,” he says.

Now, all bets are off. “If Congress couldn’t do it this year, why will they be able to do it next year?” says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse “congressional malpractice.”

It certainly has created a mess and made already difficult decisions all the more complicated. We’ll have more tonight on Marketplace.

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