Mark Washburn
Cheating the Taxman

Four keys to reconsider about estate tax and dying in 2010.

January 14, 2010
by Mark Washburn, CPA/MST

As absurd or crass as the subject may sound, death in 2010 takes on special implications from a tax perspective. Due to reasons known only to or understood by Congress, a provision of the 2001 tax law that eliminated the estate tax for 2010 was not made permanent. As a result, barring any legislative changes that might reinstate the tax retroactively, for this one year only, taxpayers who die can actually cheat the taxman out of what they consider rightfully theirs when they die. Although the estate tax returns in 2011, there appears to be nothing happening in Congress to resurrect this unpopular tax in time for 2010.

Some people may ask “So what?” or “Why do I care?” about this right now. For those of us in the business of providing advice to taxpayers, there are serious issues involved in end-of-life planning. Perhaps the most serious issue is the return of the estate tax in 2011. Reason: Estate tax rates will be higher (55% vs. 45% in 2009) and the decrease in the exemption from $3.5 million to a little over $1 million. As macabre as it sounds, careful consideration must be given to dying in this one year.

Consider the following scenario: It is now December 28, 2010. An individual who would be subject to the estate tax in 2011 lies near death and doctors give no hope of recovery. The individual’s life functions are being mechanically maintained. Further, no directive exists that reflect the dying person’s wishes in this situation. Do the decision-makers act out of compassion or as a result of some temporary tax relief? Some people would claim that a decision to terminate heroic life-sustaining measures result only from compassion to their loved one. Is it really the truth or just what they would have us believe? Are you glad this decision is not on your horizon?

For more than 450 people a month who otherwise would be subject to an estate tax in 2010, these decisions may be real. What if they find out in 2010 that they are now in some terminal stage of disease but with an unpredictable timing of death? For those who may survive into 2011, these issues certainly will be real. As such, tax practitioners must be prepared to offer objective advice in the most difficult times of their lives. This is that critical point where I enter the discussion as a trusted advisor.

Don’t Let Taxes Drive Your Advice

Lest I appear to be motivated solely on the basis of how tax law impacts death, let me assure you nothing is further from the truth. In fact, many times I advise clients to make decisions on a basis other than tax considerations. Decisions involving the death of a loved one should never be made solely on the implications or effects of tax laws. However, to be honest, few decisions involving tax considerations rise to the level of those involving the estate tax.

Provide Objective Advice

So, what should a person who is facing death in 2010 do? For those individuals who might be subject to the estate tax in 2011 and are faced with serious end-of-life considerations now, I would suggest that while they can make their wishes known, now is the time to update living wills or any other end-of-life directives regardless of form. Of course, the legal work is not the domain of the certified public accountant, but often in estate planning, certified public accountants (CPAs) work in conjunction with the family attorney. Because of the implications of the tax law, perhaps those directives need to be revised at this time. For those individuals who have put their trust in you, you should provide them objective and unbiased tax advice and leave the legal work to the attorneys.

Maintain Decision Flexibility

Whatever decisions are committed to today need to retain a certain amount of flexibility. The reasoning behind this statement is that no one knows for certain how Congress will handle the lapsing of the estate tax. It always remains a possibility that the law could be reinstated and made retroactive to January 1, 2010. Were that to happen, commitments to certain strategies could easily be undone.

Be Compassionate

Most individuals have a difficult time contemplating their mortality. Articulating what should happen to them at the time of death, creating living wills, end-of-life directives, final wills and estate planning all challenge even the most stoic of individuals. Adding the stress of moving estate laws only serves to heighten the anxiety. Therefore, remember to exercise compassion during these difficult discussions. Most people only want to be remembered as decent and caring individuals. Perhaps Congress could add some final dignity to this situation by permanently repealing this abhorrent law.

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Mark Washburn, CPA/MST, is a Senior Lecturer in Accounting at the University of Texas at Tyler. He teaches both Individual and Corporation tax courses at the undergraduate level. He is a certified public accountant licensed in Texas and holds a Master of Science in Taxation from the University of Texas at Arlington.