DIY Estate Planning and the “Death Tax”: A Lesson

On February 12, we had the opportunity to celebrate Abraham Lincoln’s 210th birthday. Beyond splitting rails in Western Illinois and then shepherding this country through the horrors of the Civil War and freeing the slaves, he is credited with making the statement, “He who represents himself has a fool for a client.”

That advice may be best exemplified by the circumstances of our former Chief Justice of the United States Supreme Court, Warren Burger, who died in June 1995. According to a Washington Post article dated November 1, 1995, Justice Burger “prepared a ‘woefully inadequate’ will before he died, and it will cost his heirs plenty.” As the Post writer commented, “The legal tangle is a cautionary tale for those Americans who have avoided proper estate planning.”

The newspaper reported that Justice Burger, age 87, after his wife died, used a computer to type a one-page will leaving 1/3rd of his $1.8 million estate to his daughter Margaret and two thirds to his son Wade. With proper planning he could have avoided federal and state estate taxes of more than $450,000. A Google search reveals that since 1995, there have been several commentaries regarding Justice Burger’s intentions and planning, both pro and con, and whether or not Justice Berger was right or wrong in his planning. Needless to say, the central focus of those commentaries was the application of the federal estate tax.

Current Political Arguments on the “Death Tax”
In the recent weeks, with an unprecedented shut down of the federal government as well as an ever increasing “budget deficit” from $665 billion in 2017 to an estimated $833 billion in 2018, several Senate Republicans including South Dakota’s John Thune, Kentucky’s Mitch McConnell, Iowa’s Charles Grassley and several others have re-introduced a bill to repeal the federal estate tax. This tax is often referred to as the death tax because it is imposed on property owned by a decedent at the time of his death. Since the current tax was enacted in 1916, it has been the subject of intense political debate and the current thrust of the argument in favor of repeal, is that it imposes an undue burden on small businesses and family farms.

Sen. Thune is reported to have asserted, “Oftentimes, family-owned farms and ranches bear the brunt of this tax, which threatens families’ agricultural legacies and makes it difficult and costly to pass these businesses down to future generations. This way of life is integral to so many South Dakota families, which is why I remain committed to removing roadblocks for these family businesses, and we can start by repealing the death tax once and for all.”

Sen. Grassley is reported to have said, “The estate tax doesn’t serve any purpose except forcing family farms and family-run businesses to waste precious capital on costly tax planning and in too many cases, paying taxes on income or property that have already been taxed once.”

The other side of the aisle, which was joined by Sen. Susan Collins (R) of Maine during the consideration of the 2018 GOP Tax Plan, opposed efforts to eliminate the estate tax, which then amounted to 40% of the value of estates more than $5.49 million for individuals and $10.98 million for couples. Sen. Collins stated, “I don’t think there’s any need to eliminate the estate tax,” noting that most family businesses, farms, and ranches are not impacted by this tax.

The tax plan, as adopted in 2018, instead of eliminating the estate tax, increased the exemptions for individuals from $5,490,000 to $11,180,000 and for married couples from $10,980,000 to $22,360,000. Those exemptions are to increase in 2019 to $11,400,000 and $22,800,000, respectively, with exemptions in the following years to be “adjusted for inflation.”

Despite Sen. Grassley’s admonitions about wasting “precious capital on costly tax planning,” if one has the good fortune to fall into the “upper one percent” or so and who, potentially, has an estate that exceeds the current “exemptions,” following Justice Berger’s plan might not be the best way to preserve the family jewels. Equally, despite Sen. Thune’s repeated, albeit unsuccessful attempts to repeal the estate tax, a plan based upon the hope that “repeal” is just around the corner, might not be the best. Perhaps, following Abraham Lincoln’s advice would be more prudent, coupled with advice from a trusted fortune teller.