The saying that nothing is more certain than death or taxes doesn't apply to all of Sanford Schlesinger's clients. The trust and estates attorney has one client, for example, who died and left $70 million — but it's not clear whether or how much the heirs will actually inherit.
"It's possible people will get anything from millions of dollars to zero," he says. "So I have to tell people, 'We don't know what you're going to get. Don't assume you're a millionaire.' "
Such is life after death in 2010 — at least for those with lots of money.
Phasing Out Federal Estate Taxes
The complication stems from this: The Bush administration phased out federal estate taxes over 10 years. This happens to be the first and only year they don't exist. After this year — if Congress does not act — they go back to their pre-2001 levels of 55 percent on estates that exceed $1 million.
And that's not the only way in which this year is quirky. Heirs won't have to pay taxes on their grandparents' assets — something known as a generation-skipping transfer tax. Gift taxes are taxed at a maximum rate of 35 percent this year, lower than the normal rate.
On the flip side, people who sell their inherited assets will have to pay higher taxes on the appreciated value this year. And the exemption doesn't apply to states that collect their own estate taxes.
All of this is confusing — even for legal exerts like Schlesinger. Is it, on balance, a good year to die for the rich?
"I don't know," says Schlesinger. "It would be a shame if I decided to die and Congress reinstates the estate tax, and I died for no reason."
A Retroactive Tax?
But as the year drags on, Congress may have less ability to apply a retroactive tax, says Ray Madoff, a professor at Boston College Law School.
"It's now mid-April. It's getting less likely Congress will be able to do this kind of retroactive fix, because it raises constitutional questions about whether you can change tax rules retroactively," she says.
Last year, the House passed a bill that would reintroduce estate taxes, but only for the wealthiest Americans with more than $3.5 million in assets. The Senate has yet to act.
"Congress doesn't know which way to go," Madoff says. Things are stalled because it's a no-win situation for Congress. On one hand, insurance companies, universities and charities benefit from an estate tax.
On the other hand, Madoff says, "there's been some very effective marketing against the estate tax." Calling it by another name — "the death tax" — works, she says, because it suggests it is applicable to everyone.
In fact, the absence of estate taxes this year will not affect the U.S. economy. According to The Tax Institute, a research arm of H&R Block, 6,000 people who died last year were wealthy enough to have their estates exposed to the federal estate tax. Their estates paid less than 1 percent of the net tax revenue collected by the Internal Revenue Service.
But estate taxes provide a huge incentive for people to give to charities. And Madoff says that historically, the gap between the rich and poor expands when the estate tax decreases.
In the meantime, she says, it makes for some pretty uncomfortable situations. At a funeral Madoff recently attended, she was approached by the son-in-law of the deceased.
"He just sidled up to me and asked me whether he thought they were going to have to pay estate taxes," she says. "Boy, I was really stumped."
Schlesinger, the estates attorney, says the question marks are affecting dozens of clients who are trying to plan their estates.
The fact that estate taxes will go up on Jan. 1, 2011, if Congress doesn't act is leading to some pretty bizarre language, he says. Clauses that say, "If I die this year, treat my will as if it were last year." And contingencies in cases of living wills that say, more or less, "Pull the plug if there's no tax. But keep me plugged in if there is one."
In the meantime, he has this advice: If you're rich, watch your back.
Schlesinger says: "If we come down to November and there's no estate tax, if I were grandma I would not show up for Thanksgiving dinner without a food taster."