Dying to Save Taxes?


2013 is here, and after months of post-election sound and fury, we finally have resolution with the dreaded "fiscal cliff."  

By this point, we're all familiar with the income tax consequences of the cliff: the Bush tax cuts would expire, the 2% payroll tax holiday would expire, and the Alternative Minimum Tax (AMT), which up until now had never been indexed for inflation, still hadn't been "patched" for 2012, meaning it would affect 27 million more Americans.  

But the fiscal cliff also threatened some dramatic estate tax changes as well. Taxpayers dying on December 31 could leave a tax-free $5.12 million "unified credit" to their heirs, and pay a 35% rate on any balance above that amount. On January 1, however, that unified credit would shrink to $1 million – and the tax itself would jump to 55%. Die on December 31 with a $3 million estate and owe Uncle Sam nothing. Die just one day later, and pay a $1.1 million tax. That's one awfully expensive day!  

Of course, Washington spent New Year's Day scrambling its way back from the cliff. As we know, we'll keep the Bush tax rates on incomes up to $400,000 ($450,000 for joint filers) and get a permanent AMT fix. As for estate taxes, the unified credit stays the same and the rate climbs to 40%.  

Although the changes to the estate tax were not as dramatic as they could have been, it’s still interesting to consider how they could have affected certain taxpayers and estates. So, here's an awkward question, moot as it now may be: with such large estate taxes at stake, would millionaires choose to die early to spare their heirs the risk of higher taxes?

You probably won't be shocked to learn that determined patients can literally will themselves to delay death past important dates like birthdays, holidays, and anniversaries. Hospitals saw death rates drop significantly in the last week of 1999, only to increase by similar amounts in the first week of 2000. That suggests that patients were determined to catch at least a peek at the new millennium. But dying early to save estate taxes? Really . . . ?

Well, believe it or not, yes. A 2003 study published in The Review of Economics and Statistics by two economics professors asked if changes in estate tax rates affected mortality rates – and found that for individuals dying within two weeks of a tax reform, a $10,000 change in estate taxes increased the chance of dying in the low-tax period by 1.6%. This is hardly surprising when living longer let people claim the savings. But the authors even found evidence of people dying sooner to avoid the increases (that's especially ironic considering that, by definition, nobody gets to enjoy saving tax on their own estate).

We are always saying how important it is to proactively plan your finances and taxes, but that takes it to a new level!