Estate taxes Featured

7:00pm EDT February 24, 2008

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 rgreenberger@tbcpa.com.