Are Bill Gates & Warren Buffett Walking Dead Men?

Many of my clients have heard me quip about how Bill Gates and Warren Buffett should be worried beginning New Year’s Day, 2010 because of the large target that Congress has placed squarely upon their backs. Now, to be honest, there is most likely no actual, physical threat to their lives because they have probably done appropriate estate planning. But this quip helps me to illustrate a point about Estate Taxes. On New Year’s Day 2010 – unless something happens within the next few weeks over in Washington D.C. – the Estate Tax or “Death Tax” will go away in a puff of smoke. In other words, as the laws currently stand, any one individual who dies in 2010 owning over $3.5 million worth of property will not have to pay Uncle Sam 1 red cent in estate taxes.

For the sake of illustration, let’s assume that Mr. Gates died “intestate” (i.e. without any wills or trusts in place) and that he wasn’t married.

Example 1: Bill Gates dies Dec. 31, 2009 with a $40 billion estate (this is a reasonably accurate estimate of his net worth). According to law, $3.5 million of that is exempt from estate taxes, leaving his estate with approximately $39.9965 billion. That remaining amount will be subject to an approximately 46% estate tax ($39.9965 billion x .46 = $18.39839 billion). So over $18 billion of Bill Gates’ estate would go to Uncle Sam just because he died without planning. With planning, however, he could most likely avoid paying most, if not all, of that amount to the IRS.

Example 2: Same facts as
above, but Bill Gates dies one day later, on Jan. 1, 2010. Here, the current laws provide an unlimited estate tax exemption (not just a measly $3.5 million exemption) beginning in 2010. So all $40 billion will pass to Bill Gates’ heirs completely Estate Tax free.

So what’s the problem? The issue that we’re facing is that, unless the law changes very soon, in 2011 the estate tax exemption amount drops from an unlimited amount to $1 million per person and the Estate Tax rate jumps up to 55%. So in our above example, Mr. Gates’ heirs stand to inherit an additional $22 billion, simply based upon Mr. Gates’ dying in 2010 rather than in 2011. That’s quite an incentive to make sure “dear old dad” passes away sometime between Jan. 1, 2010 and Dec. 31, 2010.

Although it seems absurd to entertain the notion that patricide could become the order of the day in 2010 due to this tax law, many serious estate planning practitioners are not laughing about it. Why? When money is involved, things can – and often do – get ugly really fast. Any estates attorney can rattle off numerous examples of family members turning into completely different people after the hearse pulls away.

Most estates attorneys however do not think that this will become a reality. In fact, currently there are a number of proposed laws that the U.S. Congress is working on to address this problem. Here’s what some of those that are “in the know” are saying may be the likely solutions adopted by lawmakers:

• The Estate Tax will not go away in 2010. Rather, the $3.5M exemption will apply to 2010 and beyond with the maximum Estate Tax rate staying at around 45%; or

• The Estate Tax exemption will change to $5M per person, with a person’s primary residence exempted from any Estate Taxes, and with an Estate Tax rate being set at approx. 35%.

The answer to my question in the title to this article, however, is almost assuredly “no.” Regardless of what happens in Congress, Mr. Buffett and Mr. Gates have likely employed professionals to help them plan for and avoid the pitfalls associated with the transfer of their wealth.

If, however, there’s anything that can be learned from the craziness that surrounds this issue, it’s this: what Congress giveth, Congress may taketh away. We have some huge national deficits right now and Congress will most certainly be looking for ways to pay off those deficits. While these large estate tax deductions may last for some amount of time, things can (and often do) change overnight with regard to the tax laws. And while there are excellent, and
possibly even more compelling reasons to do your estate planning above and beyond reducing tax bills (e.g., planning for minor children, planning for incapacity, privacy, etc.), estate taxes will remain a central theme for many when doing estate planning. So until New Year’s Day, stay tuned as the “drama” that is our tax code unfolds . . . (Blech! :) )