The new law won’t make a dent in how much the rich can leave their heirs, but don’t think the battle is anywhere near over.
Like some Brigadoon concocted by Bush-era tax attorneys, 2010 appeared out of the calendrical mists bearing no federal estate tax. None. Zippo. Cue the big musical number, especially if you are the beneficiaries of the five or so billionaires who bought the farm this year.
Take Dan Duncan, the Houston oil and natural-gas tycoon who co-founded Enterprise Products Partners. When the 77-year-old died of a brain hemorrhage in March, his fortune was an estimated $10 billion, according to the research firm Wealth-X. Were that subject to the 2009 top estate tax rate of 45%, the federal government would be looking at a tidy $4.5 billion. (Duncan’s spokesman says much of his estate was already transferred to his children or will be given to charity.)
Tally up the lost estate taxes from the other superwealthy who passed this year — including John Kluge, founder of Metromedia ($7.5 billion fortune); Mary Janet Cargill, heir to Cargill, the agricultural giant ($2.5 billion); real estate investor Walter Shorenstein ($1 billion); and New York Yankees owner George Steinbrenner ($1 billion) — and the cash-strapped federal government missed out on another potential $5.4 billion in taxes, for a total for all five billionaires of about $9.9 billion. And that’s just the billionaires. Overall, Uncle Sam collected $21.6 billion in estate taxes for 2009. This year: $0.
According to the wording of the bill just passed by Congress, assets from an estate passed on to a spouse or heir in 2010 are still subject to a capital gains tax if the heirs decide to operate under 2010 law. Since the superwealthy are only taxed under that scenario at a maximum rate of 15% it’s a no-brainer they will opt for paying a little out in capital gains to avoid the larger estate tax bill they would be subject to under the 2011 rate approved by Congress. Starting in 2011, estates will be taxed at 35% above $5 million. The feds could try to go after the 2010 estate tax they missed out on retroactively, but since they had all of 2010 to make their move in court, and didn’t, judges aren’t likely to look kindly on it now, legal experts say. And even if they were to try, they will be battling some of the best-paid estate attorneys on the planet.
“It is a huge windfall for these estates,” says University of California at Davis law school professor Joel Dobris, who specializes in estate law. Dobris believes that the billionaires’ tax attorneys would have had plans in place such as cutting back on charitable giving to maximize the amount heirs could keep this year. (On the flipside, some billionaires, including Warren Buffett and Bill Gates, support big amounts of charitable giving and an estate tax.)
And what of the “kill Granny” phenomena? The lack of an inheritance tax jokingly triggered a flurry of scenarios in which ultra-rich relatives would be flung from trains and scenic overpasses. Of course that didn’t happen. What did happen was a compromise estate tax that still leaves room for grumbling on all sides. Plenty of people think a $5 million exemption and 35% tax rate is far too generous. And there is still a vocal faction that wants to get rid of the estate tax — the “death tax,” as they like to call it — altogether. They are fantasists: 2010 witnessed an accident not likely to occur again, a tax haven that, like those charming Brigadooners, will simply vanish. What won’t disappear for long, however, is the wrangling over estate taxes. The recently enacted tax law expires in two years. You can bet the debate over what’s fair and for whom, will begin far in advance.
–Reporter associate: Daniel Roberts