Estate Tax Loophole Forces Hard Choices for Families with Rich Old Relatives
Families with a rich old relative nearing the end have a reason to hasten it. Lloyd Grove talks to tax lawyers about the estate tax loophole presenting a powerful moral dilemma.
There are only nine more shopping days till Christmas, and—if you’re heir to a rich old coot who’s been doing poorly of late—only 15 more days to receive the most fabulous gift of all.
Namely, the next of kin to the superrich have slightly more than two weeks to reap the rewards of what Nobel Prize-winning economist Paul Krugman dubbed “ The Throw Momma From the Train Act of 2001.”
This quirky provision of the tax code, signed into law by George W. Bush along with vast income tax cuts that have proved ruinous to the federal budget, designates 2010 as the calendar year during which a very prosperous person can expire and owe zero to the government.
It’s a circumstance that poses fundamental questions about human nature. The answers are not necessarily pretty: Will the lives of terminally ill rich folk be shortened to meet this year’s Dec. 31st deadline? Ditto last Jan. 1st : Would extraordinary measures have been taken to prolong life for the same crass reason?
“Last New Year’s Eve, I had a call from a New York Post reporter, asking, ‘Will people be kept alive artificially so they last into next year?’ ” says New York attorney Jonathan Blattmachr, one of the nation’s foremost experts on estate planning and tax law. “And I said, ‘Would you like to get a job promotion? Go to Mr. Rupert and advise him to hire a food taster for this coming year!’ I actually think she might have been offended.”
Before he retired recently from the white shoe law firm Milbank Tweed, Blattmachr counted many rich folks among his clients. He has, as a result, a refreshingly jaundiced view of his fellow man. “It really wouldn’t surprise me if a son or daughter of a wealthy parent told the doctor to give mother a little more morphine,” Blattmachr says. “Maybe a lot more morphine.”
Blattmachr spins other possible money-saving scenarios: If the deadline is fast approaching and the final curtain seems imminent, why not fly Grandma to Hawaii or Alaska to add a few hours to 2010? Or if Grandma lasts, say, 20 minutes beyond midnight Dec. 31st, try persuading the attending physician that she was “medically dead” before the year’s end and have the death certificate filled out accordingly. It gives a whole new meaning to the histrionic expression (popularized during the health-care debate by Iowa Republican Sen. Chuck Grassley), “Pulling the plug on Grandma.”
“It really wouldn’t surprise me if a son or daughter of a wealthy parent told the doctor to give mother a little more morphine,” Blattmachr says. “Maybe a lot more morphine.”
“I suppose it’s even possible to say to a very wealthy person, ‘Look, you’re going to die in the next month anyway, would you help me out and end it a little earlier?’” Blattmachr says. “But it’s interesting. In my experience, people care tremendously about themselves, but they aren’t all that concerned if their heirs have to pay some taxes. If they were, that would be extraordinary. They think that they’re probably getting enough already.”
Yet so far this year, countless millionaires and at least five billionaires have taken advantage, as it were, of this term-limited benefit—though not necessarily by choice. The bereaved loved ones of Texas oil pipeline mogul Dan L. Duncan (net worth: $9.8 billion), California real-estate developer Walter Shorenstein ($1.1 billion), agribusiness heiress Mary Janet Morse Cargill ($1.6 billion) Yankees owner George Steinbrenner ($1.5 billion) and media mogul John Kluge ($6.5 billion)—whose estates, in a normal year, would have been taxed at 45 percent—pocketed a cumulative $8.6 billion in what otherwise would have gone to the Treasury.
“Having watched both of my parents die, I can say that there is some flexibility about the timing of when it happens,” says a prominent taxation expert who asked not to be identified. “The truth is that we do have legalized assisted suicide. My father, who had pancreatic cancer, had signed all kinds of DNRs [do-not-resuscitate orders], and there were different outcomes of how long you wanted to suffer. My father went the fast way. But you could imagine that if it was an advantage to live another week longer or another week shorter, he could have done so. The people who vehemently oppose the estate tax are the ones who are all about incentives.”
Two Australian academics recently studied the possible impact of the tax holiday on death rates, and concluded that it could be significant. Extrapolating from the experience in Australia, which abolished the national estate tax in 1979, Joshua Gans and Andrew Leigh reported: “Our results from the abolition of estate taxes in Australia suggest that a significant number of United States taxpayers who would face the estate tax if they died in the last week of 2009 may well shift their reported death date to the first week of 2010. Even the super rich cannot cheat death forever, but some may be able to stay alive long enough to avoid the estate tax.”
As Gans and Leigh argued, “economists believe that incentives govern almost everything, and the evidence from Down Under is that they may be right.”
Medical ethicist Courtenay Bruce, of Santa Clara University’s Markkula Center for Applied Ethics, offers a rosier behavioral scenario: “Surrogate decision-makers (e.g., family members) should make decisions in accordance with the wishes of the patient and should not be driven by financial considerations,” she says in an email. “From my experience working in hospitals, decisions at the bedside are not made on the basis of tax incentives. Could it happen in theory? Maybe. Should it happen? Likely not.”
Needless to say, the recent efforts of three liberal Democratic senators to reinstate this year’s death tax retroactively—and raise it to 65 percent for very large estates—came to naught. Similarly, the lame-duck Democratic House majority’s threats to abrogate the tax agreement that President Obama struck with the Republican leadership—which calls for exempting the first $5 million, $10 million for couples, and taxing the rest at 35 percent (instead of the 2009 rate of 45 percent)—will be a tough sell in the Senate. On Wednesday, the Senate voted to extend the Bush tax cuts and lower the estate tax rate, per Obama’s agreement.
In the meantime, the 2010 death tax holiday continues until the ball drops on Times Square. Not having any wealthy relatives myself, I didn’t even hear about this anomaly in the tax code until the 2004 Republican National Convention, which happened to take place in Manhattan. My source was Roberta McCain, Sen. John McCain’s then-92-year-old mother. At a party for her son at Cipriani 42nd Street, the indomitable Mrs. McCain told me, half in jest but wholly in earnest, that it was the intention of herself and her identical twin sister, Rowena, to hang on for another six years, when they could safely shove off this mortal coil with the knowledge that they’d be passing on their estates free and clear.
Happily, John McCain’s mother and aunt are still going strong.
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.