Berman & Asbel, LLP

Death and taxes are unavoidable but what about taxing death?

In 1789, Benjamin Franklin wrote, "'In this world nothing can be said to be certain, except death and taxes."  Experience has shown that to be the case but what about the taxation of death?  The practice of taxing transfer of assets upon the death of the owner is first known to have been practiced 2700 years ago in Egypt according to an article from the Heritage Foundation. In America, a federal Stamp Act requiring purchase of stamps when probating wills existed from 1797 until 1804.  Federal taxation of estates was used sporadically in times of war or other crisis.

The debate over whether it is right to tax assets at death has gone on since the early days of this nation.  Opponents of death taxes argue that people paid taxes on this money while they were alive and it would be double taxation to tax it again.  Proponents argue that such taxes are important to prevent wealth being locked up dynastically and that there is no absolute right to inherit wealth one did not earn.  Warren Buffett, one of the wealthiest men in the world, holds this view and he believes that America should be a meritocracy and not a nation dominated by inherited wealth. 

The modern estate tax that we have, according to the Heritage Foundation, began in 1916 with the Revenue Act (which also introduced the income tax we have today) because World War I and other conflicts had reduced the trade tariffs upon which the government previously relied.  At the time, the estate tax was intended only to affect super-wealthy Americans.  There was an exemption on taxation on the first $50,000.00.  That may not seem like a lot but adjusted for inflation, $50,000 in 1916 would be over $11 million in 21st century dollars.

The exemption amount did increase over the years but only occasionally and it did not keep pace with inflation.  By 2001, with the exemption at $1 million (with certain planning techniques like estate credit bypass trusts, it could be effectively $2 million for a couple), it was in inflation-adjusted terms worth only a fraction of its original value and was impacting a lot of people in the middle class.  If one had a paid-up home, an IRA or 401(k) and a life insurance policy (yes, life insurance counts as part of the estate if you have kept the power to choose the beneficiary which most people do), many people who during their lifetimes would not be considered super wealthy were being subjected to estate tax.

In 2001, there was a push by the Bush Administration to eliminate the estate tax.  A compromise in Congress was reached in which the exemption amounts would rise significantly until 2010 when there would be no estate tax at all.  Then, to keep the total cost of the tax cuts down, it was provided that on January 1, 2011, the whole thing would "sunset" and the exemptions and rates would go back to the 2001 levels.  The expectation has been that Congress would do something to avoid a big tax increase with the return of the 2001 levels with a $1 million exemption ($2 million for a couple) with taxes on estates larger than that taxed at 55 percent or more.

This uncertainty has required me and other lawyers to become more creative in anticipating what might or might not happen with estate tax laws.  There were also bizarre and morbid considerations that came up - at one conference I attended, the question came up about whether a lawyer had a professional obligation to advise terminally ill clients on life support of the tax advantages of discontinuing life support so they would die in 2010 rather than in 2011 when the tax would return to the old levels.

With 2010, a mid-term election year approaching,  neither Democrats nor Republicans in Congress want a return to dramatically higher estate taxes.  The House of Representatives this week passed, by a vote of 225-200, a compromise bill that would freeze the estate tax at its 2009 exemption of $3.5 million per person ($7 million for a couple) with the starting tax rate on larger estates at 45 percent.  One problem that I have not seen this addressing is future inflation.  Without indexing of the exemption (as occurs with income tax exemptions and rates), eventually, the estate tax will once again impact people in the middle class unless dramatic new legislation is passed.  The current bill now moves to the Senate.

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