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Much riding on future of estate tax

Loss of millions may sway end-of-life choices

By Mark Arsenault
Globe Staff / November 22, 2010

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WASHINGTON — It’s often said that the two certainties in life are death and taxes. For 2010, a hint of ambiguity has entered into that adage.

This year, death has not been followed by federal estate taxes, due to a quirk in the law. It has cost the US Treasury billions of dollars and fueled a battle in Congress, and it may be prompting end-of-life discussions in some of America’s wealthiest families.

Bluntly put, a very rich person could save his or her heirs a lot of money in taxes by dying before New Year’s Day.

Starting Jan. 1, the federal estate tax is scheduled to return automatically after an unusual one-year hiatus, unless Congress takes action. The restoration could have a particularly strong impact on Massachusetts, which ranks seventh among all states in people with a net worth of $1.5 million or more, according to IRS estimates.

The new estate tax would be higher and more widely applied than the last time it was in effect, in 2009. Estates would be subject to taxes as high as 55 percent, with the first $1 million exempt from the levy.

Some members of Congress have called for lowering the tax and raising the exemption, while others say it should be abolished permanently. But so far there has been no agreement on how to fix it, despite wide consensus that changes are needed.

For some families, the coming tax has the potential to raise a troubling question: Should taxes factor into the timing of end-of-life decisions? The concept has engrossed and horrified estate planners for a year.

“This idea that people are going to have ethical decisions to make about terminating life support, or just choosing not to fight anymore when we get to the end of the year — I think that’s a real concern,’’ said Danielle G. Van Ess, an estate planning lawyer from Hingham.

US Representative Cynthia Lummis, a Wyoming Republican, said constituents have told her about family members who are weighing the option of forgoing life-extending treatments to spare their heirs an estate tax bill.

“These are not people who intend to kill themselves,’’ Lummis said in an interview.

“These are people who may make a decision that would allow themselves to die naturally. They are in the position of having the choice to continue treatment or discontinue that treatment. And among the things that they’re weighing is will they be able to transfer their estates to their children?’’

Owners of large ranches with few liquid assets fear their heirs will have to sell inherited land to pay the taxes, she said. “If they extend the life-extending treatment into next year, they could jeopardize their family’s ability to inherit the life’s labor of a person who is now terminally ill.’’

Lummis would not identify the constituents who contacted her.

US Representative Richard Neal, a Springfield Democrat and member of the House Ways and Means Committee who wants the tax reinstated at 2009 rates, is skeptical that anyone would choose death over taxes.

“I’ve yet to see anybody step forward,’’ he said. “I don’t know anybody who’s going to pull the plug on Christmas Eve.’’

The impending return has also reignited debate over whether the estate tax — disparaged by opponents as the “death tax’’ — should be abolished.

The opponents argue it is unfair because the same money can be taxed twice, once when it’s earned and again after death when it’s transferred to heirs. Estate tax law is also extraordinarily complicated, making it more trouble than it is worth, said William Ahern, director of policy and communications for the Tax Foundation, a nonpartisan tax research group in Washington. Some families go to great lengths to avoid the levy.

“The Byzantine nature of estate tax law is all geared to reward the hiring of estate tax planners,’’ said Ahern. “We feel that it’s all just a mess that should be abolished.’’

But the federal government collects significant revenue from the estate tax, some $20.6 billion in 2009, including $441 million from Massachusetts estates, according to the IRS.

“I don’t know how people could be talking about eliminating the deficit and then abolishing the estate tax,’’ said US Representative Barney Frank, a Newton Democrat who chairs the House Finance Committee.

The one-year estate tax hiatus in 2010, and the impending return of the tax, are due to congressional action, but also to inaction.

Since its establishment in 1916, the estate tax has fluctuated, with maximum rates as high as 77 percent as recently as the 1970s, according to the Tax Foundation.

One package of tax cuts approved in President George W. Bush’s first term slowly blunted the estate tax, by stepping down rates while raising the number of estates exempt from the tax. By 2009, the top rate had been whittled to 45 percent, and the exemption pumped up to $3.5 million.

In 2010, the tax cuts called for a rate of zero. Almost nobody in the estate planning business expected the Democratically controlled Congress to let the year expire with no estate tax. Lawyers have warned their clients for months that Congress could pass a retroactive tax to cover 2010, but that’s now looking unlikely, specialists said.

The zero rate drew wide attention this year after the deaths of several American billionaires, including George Steinbrenner, the owner of the New York Yankees. Steinbrenner’s wealth had been estimated by Forbes magazine at $1.15 billion, meaning that his heirs could conceivably have saved as much as $500 million in federal estate taxes.

But while heirs of the superrich saved huge sums this year, another quirk is about to expose more modest estates to the tax.

The George Bush-era income tax cuts are set to expire Dec. 31, which means the estate tax would snap back to an exemption level of $1 million. That’s a much easier number to hit than many people realize, especially in an area such as Greater Boston, where real estate is expensive.

“When you have a life insurance policy and you own a home, you’re almost there,’’ said Van Ess, the Hingham estate planner.

Rob Fish, an estate planning lawyer in Framingham, cited the hypothetical case of a Bay State resident who dies within the last six weeks of 2010 and leaves a $2 million estate. Due to their complexity, estate taxes are difficult to illustrate, but as a rough guide, Fish gave the example.

That estate would owe the Commonwealth of Massachusetts $96,000 as it is transferred, but nothing to the federal government.

But if that Bay State resident were to die in January, the estate would be on the hook for an additional federal tab of $335,000, he said.

“Obviously, this is a dramatic increase in estate tax for a person of some means, but arguably not rich in today’s world,’’ said Fish.

Many Democrats, including President Obama, Frank, and US Senator John F. Kerry of Massachusetts, favor setting the estate tax at 2009 levels, with an exemption of $3.5 million.

“That would be a reasonable adjustment that would exempt most small businesses and farms and would take care of the people whose houses have appreciated significantly,’’ said Frank.

US Senator Scott Brown, a Massachusetts Republican, has not endorsed a specific plan, but he believes the terms set to take effect in January are onerous and need to be fixed, his office said.

Brown has been critical of Congress for allowing so much uncertainty to linger over the estate tax and other components of the Bush-era tax cuts set to expire. He argues that uncertainty discourages investment and hiring by businesses.

Mark Arsenault can be reached at marsenault@globe.com.

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