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Tax tip: Pull the plug on your rich granny during 2010

By Ward Harkavy in Featured, Taxes
Sunday, Mar. 29 2009 @ 11:34AM
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A shocking reminder of a tax-code glitch.

Before you go out on the town on December 31, 2010, do your wallet a favor: Visit that rich relative in the hospital and pull the plug.

Why? If your wealthy parent, granny, aunt, or uncle survives into 2011, you could inherit only the wind.

Nate Silver gives us that timely reminder over at fivethirtyeight.com. He doesn't actually recommend that you incorporate plug-pulling into your family's estate-tax planning, but he does write on March 26, in "A Good Time to Die?":

Because of a law that the Congress passed in 2001, the estate tax, which is at 45 percent this year with an exemption up to $3.5 million in assets, will be entirely repealed in 2010 before abruptly returning to its former rate of 55 percent in 2011.

Think there might be a few rich grannies pulled off a few respirators on December 31, 2010?

If such a move weighs on your conscience, you can think of the concept as "death elasticity" and you can also figure that quite a few other Americans may actually reach over and turn off the respirators while giving their grannies those good-night kisses.

Silver digs up a 2006 study by two Australian economists that notes:

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after (amounting to over half of those who would have been eligible to pay the tax).

Our findings suggest that the scheduled abolition of the US inheritance tax may lead some deaths to be shifted from the last week of 2009 into the first week of 2010.

Read the study, "Did the Death of Australian Inheritance Taxes Affect Deaths?," by Joshua S. Gans and Andrew Leigh.

For specifics on this potentially homicidal glitch in the tax code, see the March 11 Center on Budget Policies and Priorities item "Congress Should Not Weaken Estate Tax Beyond 2009 Parameters," in which analyst Chye-Ching Huang says,

The Administration's recently-released budget proposes to make permanent key features of the estate tax that are in place in 2009. This will launch a major congressional debate.

Under current law, the tax has been phasing down for several years and is scheduled to end entirely in 2010, only to return in 2011 under the parameters that were in place in 2001. To avoid such roller-coaster changes, Congress is expected to consider estate-tax legislation this year.

Which suggests a more subtle alternative to pulling the plug: Take your rich but frail relative on a roller-coaster ride — but wait until sometime during 2010 to do it.