Death: a High-Risk Investment and High-Tax Evasion Tactic

Grim Risks of Reaping Death’s Rewards
Leslie Scism and Larry Light, Wall Street Journal (February 6, 2010)

Slemrod Sees US Tax/Death Experiment
Marc Abrahams, Improbable Research (January 13, 2010)

Here’s a death and dirty money twofer for this lovely Saturday. Enjoy!

The Wall Street Journal reports on “life settlements” — investors buy elderly people’s insurance policies with the stipulation that they’ll cover the premiums while the person is still alive and then cash in upon death. As a result, the sooner death occurs, the greater the return on investment. Unfortunately (??) some people don’t go so easily…

Carol Tonzi, a court reporter in Palmyra, N.Y., sank $51,700 into partial ownership of a $5 million policy in 2003 … She says her tax preparer touted the investment as “safe and secure” and said her money in five years would grow to $82,720, a 60% increase.

But Ms. Tonzi, 52, is still waiting for the policyholder, now 89, to pass away. Over the past three years, she says she has shelled out an additional $15,000 in premium payments. She is suing the tax preparer … alleging negligent advice. “It’s a mess,” she says. “If I wanted to gamble, I would have left the money in the stock market.”

Ouch. In a similarly gruesome vein, Improbable Research (via BoingBoing) posted last month about estate taxes and timed deaths:

Our prize-winning research showed that when estate taxes are known in advance to be changing, some people time their deaths (or have their deaths timed for them) so as to save their heirs money. The evidence: in the U.S. history of estate taxes, when tax rates went up, there were less (than otherwise) deaths after the law change, and when tax rates went down, there were more deaths after the law change. …

Now the U.S. Congress has granted us a social scientist’s fondest dream — or worst nightmare — the perfect “natural experiment.” As of January 1 of this year, the U.S. estate tax has been abolished for the year 2010, and is scheduled to be reinstated in 2011 with rates as high as 55%. If our findings (and those of our colleagues in Australia and Sweden) are right, there some would be “moved” from the end of 2009 to the beginning of 2010, as some rich folks hold on to bequeath their assets tax-free. Of course, the really morbid stuff will happen at the end of this year, when dying in December of 2010 will incur no estate tax, but dying beginning in January 1, 2011 can trigger a tax liability equal to more than half the taxable estate. It’s being called the “Throw Momma from the Train” tax provision.

Weird, sad and huh? As one of them groundling proles who will inherit naught but gewgaws, good looks and bad circulation, I’ve never been compelled to imagine such things. Sounds like being super rich is unexpectedly macabre.