Euthanasia, the Latest Tax Strategy

We're almost five months into the repeal of the federal estate tax, and Congressional action that would bring back the tax for 2010 on a retroactive basis is starting to look unlikely. Considering that Congress is crowded with politicians who don't take chances with their careers in government, no action on the estate tax should be expected until after the November elections.

It is likely that a wealthy person who dies between now and November will not have any estate taxes due from their estate. This is the first time this has happened since World War I, when the current estate tax got its start. The odds are that Congress will reinstate the estate tax in November at the same levels as in 2009 - with a $3.5 million exemption and a 45 percent tax rate. The worst case scenario is that Congress can't reach agreement on the estate tax and, starting on Jan. 1, the tax comes back with a $1 million exemption and a top tax rate of 55 percent.

How does euthanasia fit into this? If your rich uncle, with a net worth of $10 million, dies during the repeal period, and you are the beneficiary of his estate, you will save between $2.9 million and $4.9 million in estate taxes, depending on what Congress does. I'm not advocating pulling the plug on your uncle if he winds up in the hospital, but you can imagine the temptation that some nephews and nieces might feel in that situation.

It is a tax situation that most tax advisors thought would never occur, but it is real and it is happening now. Should the government encourage euthanasia through its tax policies? No, but that's what we're getting from the repeal of the estate tax, followed by the reinstatement of the estate tax.

It's Getting Expensive

It has been more than four months since the federal estate tax disappeared, thanks to the Senate's lack of action. That's a total loss of about $8 billion that the treasury will most likely never recover.

How much is $8 billion? Well, look at it this way - the budget for the Army Corps of Engineers for this year is $5.1 billion. The budget for the Social Security Administration is $9.7 billion. And the budget for the EPA is $10.5 billion. At a loss of about $2 billion per month, not having an estate tax could run as much as $24 billion for the entire year. And that's a lot of tax money to waste.

Not that I like taxes, but when a tax is fairly easy to collect and has been in place for 70 years, it's lazy and unimaginative to not try to collect it. Not to mention the fact that the federal budget is nowhere close to being balanced.

For those who haven't been following the estate tax dilemma, here's a recap: This is the tenth year of a 10-year bill that steadily increased the exemption from the estate tax to $3.5 million during the ninth year of the bill. Then the tenth year eliminated the estate tax, as part of a compromise reached back in 2001. Nobody thought that we would ever get to the repeal year, but the Senate failed to take action on a House bill last December, and the tax suddenly disappeared. A few Senators think that they can cover the mounting losses with a retroactive tax, but the further we get from Jan. 1, when the tax was repealed, the less likely that is.

The Senate could still take up that House bill to extend the estate tax, but at this point it seems to be the furthest thing from their collective minds.