Because the "fiscal cliff" will not stop for death, it looks as if death's carriage may make a "kindly" stop to pick up some American millionaires this year, to paraphrase Emily Dickinson.
In 2010, after a year in which the estate tax was zeroed out altogether, Congress passed a law that set the estate tax at 35% and exempted all estates under $5 million, adjusted for inflation. That law expires in January 2013 when the exemption will fall to $1 million and the tax will rise to 55%.
Many families are faced with a stark proposition. If the life of an elderly wealthy family member extends into 2013, the tax bills will be substantially higher. An estate that could bequest $3 million this year will leave just $1.9 million after taxes next year. Shifting a death from January to December could produce $1.1 million in tax savings.
It may seem incredible to contemplate pulling the plug on grandma to
save tax dollars. While we know that investors will sell stocks to avoid
rising capital gains taxes, accelerating the death of a loved one seems
at least a bit morbid—perhaps even evil. Will people really make life
and death decisions based on taxes? ...
There is good evidence that there is some "elasticity" in the timing of important decisions about life and death. ...
An earlier paper by Gans and Leigh
looked into another natural experiment. In 1979, Australia abolished
its federal inheritance taxes. Official records show that approximately
50 deaths were shifted from the week before the abolition to the week
This isn't just
something peculiar to Australia. Economists Wojciech Kopczuk of Columbia
University and Joel Slemrod of the University of Michigan studied how mortality rates in the United States were changed by falling estate taxes.
They note that while the evidence of "death elasticity" is "not
overwhelming," every $10,000 in available tax savings increases the
chance of dying in the low-tax period by 1.6%. This is true both
when taxes are falling, so that people are surviving longer to achieve
the tax savings, and when they are rising, so that people are dying
earlier, according to Kopczuk and Slemrod.
"Death elasticity" does
not necessarily mean that greedy relatives are pulling the plug on the
dying or forcing the sickly to extend their lives into a lower taxed
period. According to a 2008 paper from University of Pittsburgh Medical Center Doctor G. Stuart Mendenhall,
while tax increases give potential heirs large economic incentives to
limit care that would prolong life, distressed patients may "voluntarily
trade prolongation of their life past the end [a low tax period] for
large ﬁnancial implications for their kin. ...
We had something of a natural experiment in death and taxes in 2010,
when the estate tax was eliminated for one year. Many predicted that
this would result in many fewer deaths at the end of 2009 and a surge in
deaths prior to taxes rising in 2011.
own research hasn't uncovered any formal academic work on this period.
Perhaps it is too recent. Or perhaps the setting of the exemption at $5
million made the sample size of those that could achieve significant tax
savings by dying in 2010 rather than 2011 too small.
But based on
past reactions to changes in taxes, it at least seems likely that some
deaths that might otherwise have occurred shortly after January 1 will
occur shortly before. Death may slip in ahead of the tax man for some
with estates worth over $1 million.