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.
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.