Two women, both heiresses years apart in age, share two things: The source or their fortunes, pharmaceuticals and estate issues after their respective deaths. Because of the changes in estate taxes, when they died is a big factor to their heirs.
What Are Estate Taxes?
Estate taxes, also called inheritance or death taxes, are taxes the government takes on the property passes to your heirs. The tax depends on the value of the estate.
In 2009, the federal estate tax was 45% on estates worth more than $3.5 million. Estates less than $3.5 million were exempt from federal taxes. Heirs didn't have to pay taxes on that inheritance. However, the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) changes the estate tax for 2010.
There's an estate tax break between January 1 and December 31, 2010. No estates will be taxed at all this year. This break affects approximately 5,500 estates this year. While this seems like no big deal or doesn't affect many people, this loophole can result in some strange consequences.
Casey Johnson and Ruth Lilly
Casey Johnson, 30, and Ruth Lilly, 94, died sometime during the end of 2009, or beginning of 2010. While their deaths were only days apart, their heirs face very different situations.
Casey Johnson's death was widely covered by the tabloids. She was found at her home on January 4, 2010. While she was last reported seen on December 29, 2009, and chances are that she may have died then, California's law says the date of death as the day the body is found.
If Casey been found or pronounced dead days earlier, her estate would have been subject to a 45% tax. However, because she wasn't found until 2010, her estate won't be taxed and her heirs lucked out.
Ruth Lilly's tax situation isn't so easy. She died on December 31, 2009. Thus, her estate, estimated at more than $1 billion, is subject to the 45% tax. Had she died just a few hours later, her estate wouldn't have been subject to federal taxes at all and her heirs would have come out with a much larger inheritance.
What This Means
Families dealing with end-of-life decisions for their loved ones are put in an extremely difficult situation by this loophole.
They'll need to consider this tax issue when deciding whether to keep their loved ones alive, putting them in the situation where they could make medical decisions based on estate tax laws.
Is the Estate Tax Gone for Good?
The estate tax will be back January 1, 2011, and impacts more families. Estates worth more than $1 million will be subject to a 55% tax.
Also, the 2010 estate tax repeal itself is uncertain. President Obama has signaled it wants a federal estate tax for 2010. The estate tax raises a lot of revenue for the government and it's unlikely they'll miss out on the chance to receive these extra funds.
There'll be much debate in Congress and about the estate tax repeal once health care reform and budget issues are worked out. As a result, many expect that this loophole won't last long, and any new laws introduced may even apply retroactively.
Get a Plan!
Right now, the best advice is to stay tuned to any Congressional developments and to check your estate plan. Next year, the estate tax is back in effect, but on $1 million estates or more. Determine the size of your estate by adding up your assets and property including your home, investments, money in bank accounts, cars and insurance benefits. You may be surprised that it doesn't take much to reach the $1 million milestone.
Also, be aware this only affects federal taxes. There still may be state taxes, which vary by state. Make an appointment to visit your estate planning attorney or other tax advisor as soon as possible to discuss the best plan.