Billionaire’s Heirs First to Win 2010 Estate Tax Jackpot

Washington lawmakers' estate tax hiatus has now potentially cost the IRS billions in lost tax collections. Experts say death of Texas billionaire Dan Duncan makes retroactive reinstatement of the death tax less likely because the stakes are now a lot higher.

Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he’d passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there’s no federal estate tax this year, the government gets nothing.

As the first billionaire to die in this year without an estate tax, Duncan presents a tempting opportunity for a revenue-strapped Congress to follow through on threats to reinstate the tax for 2010 and possibly even make it retroactive to the beginning of the year.

However, probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years.

“I never imagined it would get this far,” Joel Dobris, an estate planning professor at University of California-Davis, told me.

“The longer they wait, the stronger the ‘no retroactivity’ argument sounds,” he added. “Maybe they waited too long.”

The lack of clarity has already weighed on less monumental estates for months, says Don Ford, founder of Houston law firm Ford & Mathiason.

“We’ve had two clients fall into this already,” he told me. “They’ve died this year and would have had taxable estates under either last year’s rule or next year’s rule. But now we’ve just got to hang on and see what happens.”

Ticking Clock, High Stakes

Ford has heard that all the movers and shakers in Washington agree that the hole in the estate tax has got to be fixed, but nobody can agree on how to do it.

If nothing happens, the tax will reset in 2011 with an exemption of $1 million and a maximum rate of 50%. That would make a lot of upper-middle-class voters unhappy, Joel Dobris says, so the prospect of doing nothing isn’t popular in Congress.

Late last year, the House approved an eleventh-hour plan to keep the tax alive in 2010 under the 2009 rules, which impose a maximum 45% tax rate on estates worth over $3.5 million. But the bill went nowhere in the Senate, feeding speculation that when and if Congress reinstates the tax for this year, it would be on a retroactive basis to cover those who died after January 1.

Back in January, estate planner Phil Kavesh told me that whatever happens, making the tax retroactive would be a bit like Russian roulette: the longer the game goes on, the more dangerous it gets.

“Sooner or later, some billionaire will die this year, and then there’s a real incentive to argue that any kind of retroactive law is invalid,” he said.

Not a Big Revenue Source

Nobody in Congress really expected a billionaire of Dan Duncan’s caliber to die this year without significant estate protection already in place.

In fact, the Congressional Joint Committee on Taxation estimated last year that restoring the estate tax at 2009 levels would have only added about $468 million to the federal government’s 2010 revenue.

That kind of cash really wouldn’t have made much more than a symbolic difference in a $3.5 trillion operating budget. But symbolism matters a lot in Washington these days, UC-Davis professor Joel Dobris told me.

Duncan gave away hundreds of millions of dollars over his lifetime to local hospitals, schools, community groups, and other charitable organizations. Details of his estate plan aren’t available, but it’s likely he made huge additional bequests to be paid after his death.

If his advisors were up to the job, the bulk of his remaining wealth was probably held in trust, so it probably wouldn’t be subject to estate tax either way. (There’s no Texas estate tax, so that’s not an issue in this case.)

However, a significant slice—about $362 million, according to my math—of his fortune was locked up in a controlling stake of the energy partnerships he’d built or bought over the years.

The absence of federal estate tax this year frees his heirs from the need to liquidate that equity in order to pay the IRS. As a result, the Duncan family has already announced that it won’t be selling out soon.

Looking Ahead

For the rest of us, the clock is ticking and the spring and summer Congressional recesses are ahead. It’s theoretically possible that gridlock and inertia will leave the door open for more billionaires to leave tax-free estates this year, in which case Houston lawyer Don Ford worries that the retroactivity issue could come back in 2011.

“Does this get pushed back to next year when it becomes a real issue, and then they try to make the new exemption and rates retroactive?” he wonders. “That’s when it becomes a little unsettling.”

No matter what happens to the estate tax, Ford told me that his clients take comfort in the trusts and other estate planning instruments he’s put in place for them. “Uncertainty like this only demonstrates the value of what we do,” he told me

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research.


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