By MATT CHANDLER
Buffalo Law Journal

Thanks to changes in the rules governing the federal estate tax, wealthy Americans may have serious financial incentive to die in 2010 - or at least to live through 2009.

Researchers say patterns in death rates coinciding with changes in the estate tax, which opponents refer to as "the death tax,"confirm that people can and do manipulate their deaths to minimize taxes.

It is a phenomenon known as death elasticity. Wojciech Kopczuk, an associate professor of economics at Columbia University, co-wrote a paper offering evidence that death elasticity is not only real, it may be tied to estate taxes.

Sound too crazy, too macabre to be true?

Consider this. The top tax rate on the transfer of assets from the estate of a deceased person in 2009 is 45 percent, which translates to approximately $4.5 million in estate tax owed on a taxable estate of $14 million, in addition to any state taxes. (New York currently levies a 16 percent tax on transferred assets of more than $1 million).

As the law now stands, that same estate would see no estate tax whatsoever in 2010, when a one-year sunset is set to go into effect.

"The timing of one's death should not have such dramatically different consequences in terms of the financial impact on the family," said Larry Franco, an attorney with Hurwitz & Fine PC who specializes in estate planning and tax law. "We think this is a huge mistake, and a crisis in policy."

Lower threshold looming

If you count yourself among the millions of Americans whose estates fall well below the $3.5 million level, where the estate tax kicks in, hold onto your hat. While the $3.5 million benchmark will be eliminated in 2010, the estate tax is set to return in 2011, with the bar lowered to $1 million, casting a tax net that will snare many more American families.

While it's too early to predict how many people might be affected by the change, Franco warns that Western New Yorkers who think they would never reach the million-dollar threshold might be surprised. He said many people don't have a proper understanding of which assets are subject to the estate tax should they be transferred at the time of death.

"For example, it is commonly known that life-insurance proceeds are not subject to income tax, but it is not well understood that those same proceeds are potentially subject to the estate tax," Franco said. Add in pension plans and interests in any jointly owned property, which are also subject to taxation and, he said, "It is surprisingly easy to get to these exemption amounts."

Franco said the impact on family-run businesses can be especially devastating, as businesses that may be worth a lot on paper may not have the liquidity to pay a hefty estate-tax assessment.

Consider the case of Buffalo Bills owner Ralph Wilson, who has said publicly that the team will be sold upon his death, triggering the estate tax. Forbes Magazine has estimated the value of the NFL franchise at $900 million, creating widely divergent outcomes if Wilson should die within the next 18 months.

In the event that Wilson, 90, should die this year, "The cost to his estate of paying the estate tax for his ownership of the Buffalo Bills could be such a significant amount of money that his estate would be unable to cover the estate-tax cost," Franco said. What's owed in estate taxes would be, he said, "hundreds of millions of dollars, potentially" - compared to no estate taxes due if the Bills founder happens to die in 2010.

While Wilson is an extreme example of the impact the estate tax could have, Franco said modest family-run businesses may also find themselves unable to pay the estate tax. The top rate is set to increase to 55 percent in 2011, potentially driving people to sell off businesses that have been in their family for generations.

Revisions expected

While many observers expect Congress to change the tax code as it applies to the estate tax before the end of the year - our sources said they expect the Obama administration to maintain the estate tax at the $3.5 million threshold - estate planners like Terrie Benson Murray of Cohen & Lombardo PC are caught in the middle when it comes to advising their clients.

"When I'm working with a client where they are over the million, but they're not over the $3.5 million, they are going to have a situation where they are going to have to pay in 2011, and we are simply assuming it is going to go back to $1 million," she said. "It probably won't, but I'm on the conservative side here. I don't want people to think they are fine, and I always talk to my clients about this and tell them it is a huge issue."

To offset the expected impact of the estate tax as the law stands now, Murray advises her clients on their options of gifting some of their assets, reviewing joint ownership of property and purchasing life insurance with their estate as the benefactor to make sure there's enough cash available to cover the estate tax.

"If the economy improves," she said, "you are going to see a lot of people with a whole lot more money, which will change things even more."

Death and taxes
The federal estate tax, by the numbers.

• $3.5 million: Estate value at which the estate tax kicks in now
• 45 percent: Current rate of taxation for taxable estates
• $0: Amount U.S. estates would be taxed as of Jan. 1, 2010
• $1 million: Estate-tax threshold set to take effect Jan. 1, 2011
• 55 percent: Tax rate on transferred assets above $1 million, as of 2011
• 16 percent: Current New York state estate tax rate, for estates worth more than $1 million