Death and Taxes Revisited

On January 1, the estate tax will disappear for one year. As a result, according to some estate planners, the timing of death has never had such a financial impact. Die before January 1, and anything in your estate over the exemption level of $3.5 million will be taxed at 45%. Die after January 1, and there’s no tax at all. The estate tax rules have generated some bizarre scenarios, as many rich taxpayers cling to life to make the January 1 date. Families with relatives on life support have also had to make crucial decisions about end-of-life care.

The change in the estate tax is the culmination of legislation that Congress passed a decade ago. The law stepped up the exemption from $675,000 and cut the tax rate gradually, ending with a complete repeal of the tax in 2010. Unless Congress acts, the tax will return in 2011 with a $1 million exemption and a 55% tax rate on anything over that. According to estate planners, that will lead to more complex scenarios next December, as patients and families wrestle with decisions on providing care to those who are terminally ill.

Perhaps because health care reform took up so much of their time and energy, lawmakers in Washington defied the odds by not passing an extension of the estate tax before the end of the year. Although Congress could pass a law that would be retroactive to January 1, most estate planners view that possibility as a disaster. The law would undoubtedly be challenged in court, they say, perhaps all the way up to the Supreme Court, and the outcome could be in doubt for years.