U.S. estate tax eliminated this year --in theory
If you're a wealthy U.S. citizen or a Canadian who owns property in the United States, 2010 may be the ideal year to die.
That's because the dreaded U.S. estate tax, which is based on the fair market value of all property owned on the date of death, has been eliminated --at least in theory --for 2010 only.
The estate tax applies to all U.S. citizens, no matter where they live, and could also apply to Canadian residents who are not U.S. citizens if they own U.S. situs property, such as stocks or real estate.
The repeal of the estate tax was originally announced back in 2001 as part of a broader reform, which lowered the top tax rate on estates over US$1.5-million to 45% from 55% and increased the exemption from a paltry US$675,000 to a high of US$3.5-million in 2009.
In 2011, the estate tax is scheduled to come back at full force, with a top rate of 55% and an exemption of only US$1-million.
Many tax professionals believe that the U.S. government will ultimately act to reinstate the estate tax, retroactively, for 2010 as well, legislating lower rates and a higher exemption for 2011 and future years.
In fact, this process was already underway late last year when the U.S. House of Representatives approved a bill which would have permanently extended the US$3.5-million exemption and kept the top rate at 45%. But the bill failed to win support in the U.S. Senate as many senators from both parties favoured increasing the exemption to US$5-million.
The result of this disagreement between the House and the Senate is that, at least for now, there is no U.S. estate tax for deaths in 2010. Since U.S. estate tax returns are not due until nine months following the date of death, the U.S. government essentially has until the end of September to reinstate the tax before the first returns become due.
While some U.S. legal experts question the constitutionality of a retroactive estate tax, there is precedent in an earlier court decision. In that case, heirs tried to challenge the validity of a retroactive estate tax increase which cost the estate an extra US$1.3-million. The retroactivity was upheld by the court.
So, could this temporary uncertainty in U.S. estate tax law actually shift deaths from 2009 to 2010?
A 2006 study by two Australian professors, titled "Toying with Death and Taxes: Some Lessons from Down Under," looked at what happened in 1979 when Australia abolished its inheritance taxes. Using daily deaths data, they observed that "approximately 50 deaths were shifted from the week before the abolition to the week after. Although we cannot rule out the possibility of misreporting, the results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate."