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Die early and save!

February 05, 2010

Elective deemed death may be the gimmick to break the estate tax deadlock. The Wall Street Journal reports:

A proposal to allow wealthy people to prepay estate taxes while they are still alive, in exchange for a lower tax rate, has caught the attention of Senate staff trying to craft a bipartisan, permanent compromise on the estate tax.

The estate tax prepayment idea is being pushed by Sen. Maria Cantwell (D., Wash.) as a possible compromise between senators who want a permanent, 35% estate tax rate and the position of President Barack Obama, who supports a 45% rate on inherited wealth. ...

The plan would allow wealthy people to place assets in a prepayment trust while they are still alive. Those assets would be subject to a 35% tax, which the estate owner would have five years to pay, according to a document describing the plan, obtained by Dow Jones Newswires. ... [T]he measure could be expected to have a net positive effect on revenue over the next 10 years to the extent that wealthy families begin to prepay taxes to take advantage of the lower rate.

Actually, the just-expired tax law already has a provision that pretty much does that. It's called the gift tax. The tax cost of gifting assets is lower than that of passing them on at death because the gift tax rate is imposed only on assets that reach the next generation; the estate tax is imposed on the whole estate, including the amount that has to go to the government to pay the tax. Sure, you have to give assets away to qualify for the gift tax, but that's just a detail.

In real life, relatively few people make taxable gifts, even when it means estate tax savings. It's unlikely that Senator Cantwell's deemed death provision would be much more popular.

Via The TaxProf.

Tags: Estate planning.estate tax.

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