The Incredible Estate Tax Escape

The death of New York Yankees owner George Steinbrenner this week provides his heirs with a huge windfall: an estate with an estimated in excess of one billion dollars, inherited in a year when there is no Federal estate tax.

At the end of last year, I noted that Congress had so far failed to address the temporary expiration of the Federal Estate tax.  Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (a.k.a. “EGTRRA”) the tax expired at the end of last year and will return January 1, 2011 to the rules that existed prior to EGTRRA.  These include a top rate of 55% and a $1,000,000 exemption.

Congress was apparently too preoccupied to modify the law before the beginning of this year.  But surprisingly, it still hasn’t acted to close the door on the estate tax windfalls that a small number of heirs have received this year as a result of EGTRRA.  Although wealthy people usually find ways to minimize their estate taxes, the complete absence of the estate tax is an incredible break for their heirs.  Steinbrenner’s heirs also benefit from the fact that his official residence was in Florida, a state with no inheritance tax.

Although less than 1% of all estates actually end up owing federal estate tax, Steinbrenner’s death is likely to bring renewed calls for ending this year’s estate tax moratorium as his death draws further attention to the amount of Federal tax income that has been lost.  Steinbrenner joins several billionaires who have died this year, including Texas oilman Dan Duncan, whose estate is estimated to be worth $9 billion.

Last month, a bill was introduced in the Senate to restore the estate tax and make the 2009 Federal estate tax rate apply retroactively to all estates probated in 2010.  Even if Congress acts on this, it’s not clear that the retroactive provision could stand up in court.  The U.S. Constitution prohibits ex post facto laws, i.e., laws that penalize someone for doing something that was legal at the time the action took place.  If this feature of the bill passes into law, the heirs of several large estates — including Steinbrenner’s — will have millions of reasons to challenge a retroactive estate tax.

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Thomas Fisher, CFP®

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