To illustrate a common issue that
business owners may face, Robert
N. Greenberger, tax principal at Tauber Balser, P.C., used an example
that most of us could recognize: “The
Beverly Hillbillies.”
“Jed was a millionaire back in the days
when a CRT was a television picture
tube (cathode ray tube), not an estate-planning tool (charitable remainder
trust),” Greenberger says. “His heirs
would have lost millions if burdened
with today’s estate taxes.”
Smart Business talked to Greenberger
about how the rules of today’s world
would have impacted the Clampetts’ fictional fortune.
This is your third article relating to estate
taxes in Smart Business. In August 2006,
Congress wanted to permanently repeal
estate taxes and you correctly predicted
that Congress would not have the necessary votes for full repeal. Have you
changed your prognostication?
No, full repeal of estate taxes is highly
unlikely in the near future, whereas a
reduction in the estate tax rates or
increase in the amount exempt from
estate tax is a strong possibility.
Instead of looking forward, can you look
back in history to help us gain an understanding of the impact of estate taxes?
If you were in front of a television
between 1962 and 1971, there was a
good chance you were familiar with
‘The Beverly Hillbillies.’ It was ranked
in the top 10 most watched prime-time
programs for six seasons. ‘The Beverly
Hillbillies’ was a series about the
Clampetts, a hillbilly family transplanted to Beverly Hills, Calif., after finding
oil on their Missouri Ozarks land.
Jed Clampett received $25 million for
the oil on his property and, by the end
of the series, his net worth was quoted at $95 million! Since Jed was widowed,
he would not have had the opportunity
to utilize the unlimited marital deduction to avoid estate taxes at his death.
Using today’s estate tax rates, his estate
would have been subject to a 45 percent
estate tax. [The estate tax rate climbs to
55 percent in 2011.]
If Jed died following the final episode
in 1971, his heirs would have lost about
45 percent of the estate to the IRS. With
about $50 million left after the estate
tax hit, would Jed’s daughter, Ellie May,
keep the remaining funds buried in the
backyard, or would she heed the advice
of Milburn Drysdale, the family’s
banker? Would Jed’s cousin’s son,
Jethro Bodine, come up with an idea for
the funds, or would he invest in oil or in
the stock market? If estate taxes depleted almost half of the Clampett estate,
the 1973 oil crisis and recession from
1973 to 1975 might have dealt the final
blow.
Could the Clampetts have implemented any
21st century estate-planning strategies to
help their situation?
Absolutely. We know Jed’s wealth
came from oil, not from insurance proceeds when his wife died. But what if
Jed had a second-to-die life insurance
policy to adequately cover almost $45
million of estate taxes? If he and his
wife had purchased a second-to-die life
insurance policy, the proceeds would
have covered the estate taxes due to the
IRS. Alternatively, proceeds from life
insurance owned by an irrevocable life
insurance trust would have escaped
estate taxes.
Jed could have also gifted his Ozarks
land to Ellie May or Jethro before finding oil on the land. The land may have
had little value at the time of the gift, so
Jed would have either paid gift tax on
the transfer of land or he could have utilized a portion of his lifetime exemption. Taxpayers can gift $1 million during their lifetime, based on the 2008
exemption amount, without incurring
any gift tax.
Suppose Jed’s land was worth $12,000
before oil was found. He would not
have needed to use part of his $1 million exemption. Instead, he could have
used his annual exclusion amount,
$12,000 in 2008, which is the annual
amount that can be gifted to each
recipient. If oil was found after gifting
the land, all of the appreciation would
have been out of Jed’s estate. At Jed’s
death, his heirs would have already
owned the bulk of his estate, so no
estate taxes would have been paid to
the IRS. Also, the heirs would have
received an extra $45 million from
insurance proceeds.
ROBERT N. GREENBERGER, CPA, PFS, AEP, is a tax principal at Tauber & Balser, P.C. He has more than 20 years of experience with
a strong concentration in taxation, estate-tax planning and closely held businesses. Bob also leads the firm’s Estate Planning Niche and
has achieved the Accredited Estate Planner designation. He assists with the planning and implementation of family limited partnerships,
trusts, Subchapter S corporations and estate/gift tax reduction. Reach him at (404) 814-4949 or [email protected].