As featured in The Wall Street Journal, Money Magazine, and more!
     

Changes in Estate Tax Law Affect When People Die

This article was written by in Taxes. 15 comments.


Between March 1917 and January 1984, there have been thirteen major changes in the rules for the estate tax, a tax paid by heirs for wealth inherited. Of these thirteen changes, eight were tax increases and five were tax decreases. In 2001, A study by the University of British Columbia and the University of Michigan determined that the timing of death surrounding these changes is elastic.

When the estate tax increased, individuals with wealth to leave to their heirs were more likely to die in the days before the increase than they were after the increase. The reverse is true when the tax law change favored the wealthy. When the estate tax decreased, individuals with wealth were able to hold on to life longer in order to save their heirs money owed to the government.

Here’s the study.

Right now, the estate tax is one of the IRS’s more complicated systems. Keeping it simple, the gross estate, after deductions, is used to determine the amount the heirs owe in tax payments. There are fourteen tax brackets from a rate of 18% for amounts below $10,000 up to 45% for amounts above $1,500,000. Keep in mind these are marginal tax rates. If you inherit $2,000,000 you do not owe 45% of that entire amount ($900,000), you owe $555,800 plus 45% of $500,000 ($725,000). But this is not currently relevant because the “first” $3,500,000 is excluded from the estate tax; effectively, the amount an heir would owe would be 45% of the amount inherited over $3,500,000. This greatly reduces the effective tax rate on an estate — for the 0.3% of all estates that end up owing taxes, their average effective tax rate is under 20% according to the Urban Institute-Brookings Tax Policy Center (source).

Unless Congress changes the law — a legitimate possibility — anyone who inherits wealth from an individual who dies in 2010 is exempt from the estate tax. If history is a guide, we should see the same pattern of convenient timing; those close to death at the end of this year will manage to hang on another week or two to pass away in a more heir-friendly tax environment.

And if the law sunsets in 2011 and the estate tax is back in force, those nearing death at the end of 2010 will accelerate their passing to get in under the wire.

Published or updated October 1, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,475
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar The Baglady

Actually I don’t think people will die just to avoid estate taxes. People will die when they die, unless their heirs murder them to conveniently time it.

Reply to this comment

avatar Steve

I assume that the deaths aren’t changing, just when they are reported/officially happen.

Reply to this comment

avatar Jim

I definitely agree with Steve.

The study actually says: “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.” so they admit they have no evidence that their data isn’t simply a reflection of people cheating on their taxes.

I think the simplier explanation is that people are simply cheating on the taxes by modifying the date of death. You really have to disprove that hypothesis before you can convince me that the much more unbelievable idea that any significant # of people cause themselves to die sooner or later to save on inheritance taxes.

Reply to this comment

avatar Evan

The estate tax form 706 – refers to date of death when using a normal valuation pursuant to the death certificate. So you would have to either forge the death certificate yourself and risk jailtime, or you’d have to bribe a doctor to claim someone died at the wrong time?

Reply to this comment

avatar Madame X

Fascinating– talk about pulling the plug on grandma,…

Reply to this comment

avatar David@DINKS Finance

I first heard about this in “The End of Prosperity” and it truly is sickening. People WILL try to accelerate the death of their elders if they are near-death. A lot is at stake. The estate tax is one of the worst taxes – you can’t even avoid taxes when you’re dead!

Reply to this comment

avatar Old Rich Guy

I hate to introduce any actual facts into this discussion, but:

I earned my wealth the old-fashioned way — I worked my buns off, starting from zero — my parents were dirt poor. I was the first in my family to graduate university, during which I continued working to supplement my partial scholarship.

I am WAY over the 3.5M exclusion. If I get a chance to reduce the amount of taxes my estate must pay, I certainly will — to pass it on to my dearly beloved ex-wife and kids who helped and inspired me immensely during the decades we shared tight belts and tough decisions. Incidentally, none of my kids live anything like Paris Hilton, who should have been spanked silly by her idiot parents. However, I would like to protect my children against the day when a loaf of bread costs a thousand dollars and filling your gas tank costs a couple of hundred thousand. I earned the ability to give my kids that protection — what are YOU doing to protect YOUR kids from this inevitability? It will certainly come in their lifetimes, if they’re under 50.

To set the record straight: I would happily pull the plug myself if doing so kept one dime from the IRS. In fact, I’m sorta planning on it if congress fails to act before 2010. I know a bunch of other old geezers who feel exactly the same way. Please stop talking as though you knew what we are thinking. It’s not the families who are accelerating or decelerating the deaths of their sick parents, it’s the parents who are doing it, you nincompoops.

I have already paid tens of millions in taxes over the years. The federal government wastes obscene amounts, not even counting the wars we fight. If you can name one single government program (other than NASA and the GSA) that achieved its goals in ANY significant way I’ll consider adding you to my will. Post here — I’ll see it.

One last thing: Warren and Bill are laughing up their sleeves when they profess to want to pay more taxes. Both of them, like me, know exactly how to write a check to the IRS if they wanted to. Both of them, like me, have small battalions of tax attorneys working to minimize their tax burdens. Both of them, unlike me, are avoiding huge estate tax bills by funding the Gates foundation. That strategy works when you’re in the bigs and have 10s of billions — it doesn’t work nearly so well in my AAA league.

It saddens me when people say that the feds deserve more money because they’ve mismanaged the budget and run up deficits. It infuriates me when people assume that the screw-ups in government will spend my estate more wisely than my own wise, hard-working, beautiful ex-wife and children.

Reply to this comment

avatar Evan

HELL YEAH OLD RICH GUY! I spend my days from 8 to 6 HELPING people like yourself plan (not avoid – avoid is illegal; plan is legal) for the estate tax. The gov’t doesn’t “deserve” money – it should work for it, by providing the services needed WHILE CUTTING WASTE! I think we have forgotten the latter.

Reply to this comment

avatar Smithee ♦1,358 (Quarter)

I’m all for cutting waste, too. Is there a database or wiki somewhere where we can find specific examples of waste, so that we know specifically what we’re talking about when we contact our Congresspeople?

Reply to this comment

avatar Evan

Smithee

A Great Place to start is the Citizens Against Waste Website:
http://www.cagw.org/site/PageServer

A Few Examples from their site – but their yearly book covers over 10,000 pork projects:
$3.8 million for the Old Tiger Stadium Conservancy in Detroit;
$1.9 million for the Pleasure Beach water taxi service in Connecticut;
$1.8 million for swine odor and manure management research in Ames, Iowa;
$380,000 for a recreation and fairgrounds area in Kotzebue, Alaska;
$143,000 for the Greater New Haven Labor History Association in Connecticut;
$95,000 for the Canton Symphony Orchestra Association in Ohio; and
$71,000 for Dance Theater Etcetera in Brooklyn for its Tolerance through Arts initiative

Reply to this comment

avatar Luke Landes ♦127,475 (Platinum)

I would happily pull the plug myself if doing so kept one dime from the IRS. In fact, I’m sorta planning on it if congress fails to act before 2010.

ORG: Wow, thanks for sharing that point of view. That’s very honest of you, and it is an example of real behavior modification based on financial considerations. I expect there are many like you, in addition to those who try to cheat the system by reporting false dates of death though as you say that’s more difficult than just writing a random date on a tax form.

Reply to this comment

avatar Candide

The heirs don’t pay estate taxes, the estate pays it. There’s a difference.

Reply to this comment

avatar Evan

Candide,

You are kind of correct. First there are issues of apportionment – this is when someone’s Will says specifically which asset should allocate the tax. But beyond that for a second – if there is an estate of $10mil and 2 heirs, aren’t they getting less because of the estate tax? Instead of getting $5mil each they are getting 3.375ish. So regardless of what checking account it comes from (i.e. the Estate checking account or theirs) aren’t they negatively affected.

Then on top of those issues there are actually 8 or 9 states with inheritence taxes – which means the receipent actually owes money to the state.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: