Mr. Duncan became the wealthiest person in Houston, and according to Forbes magazine, the 74th wealthiest in the world. When Mr. Duncan passed away in March 2010 of a brain hemorrhage at age seventy-seven, he found himself on the precipice of something historic: he may become the first American billionaire to pass his approximately $9 billion estate to his children and grandchildren completely tax free.
On June 8, 2010, the New York Times ran an article on Mr. Duncan. The article illustrates how Mr. Duncan’s case poses a rare moment in our history. Since the inception of the federal estate tax in 1916, the tax has fluctuated greatly but has never been completely repealed. When John D. Rockefeller died in 1937, his heirs paid a whopping 70% before inheriting their respective shares. Others have paid significant estate taxes on far more modest estates. In fact, until January 1, 2010 estates worth more than $3.5 million were taxed at 45%. Had Mr. Duncan died three months earlier, his billions would have been subject to a tax in the amount of roughly $4 billion. Had he lived into 2011, the tax rate would have increased to 55 percent and Duncan’s heirs would have paid upwards of $5 billion to the U.S. Treasury.
But what will become of the 2010 federal estate tax remains the key question. Despite much publicity and speculation, Congress failed to reinstate the tax for 2010. Absent a crystal ball, it is anyone’s guess whether the Senate Finance Committee’s efforts to reinstate the tax will succeed, and if so, whether the tax will be applied retroactively for 2010. Retroactive application of tax law is not entirely unheard of. In 1994, the Supreme Court voted to apply tax law retroactively fourteen months prior (Carlton v. U.S.). Under the current law, the estate tax will be back with a vengeance in 2011 at 55% with only $1 million excluded unless, of course, Congress acts to change it before the year is up.
And what does this mean for elderly Americans and their heirs? Family members need not contemplate drastic end-of-life decisions for their loved ones, especially to take advantage of a tax break. At this time little is known about Congress’ time frame to reinstate the estate tax, or if it will be retroactive. With midterm elections looming and a controversial healthcare bill to sort out, the estate tax may once again fall by the wayside.
But that doesn’t mean that proper estate planning has to follow suit. Now, it is even more important than ever to educate yourself about the law and stay informed. Proper estate planning can avoid tax consequences even for modest estates through the use of certain tax friendly trusts.
Don’t hesitate to contact an elder attorney to discuss your options today!