At first blush, Casey Johnson and Ruth Lilly, who died within days of each other around the new year, could hardly have been more different. Johnson (pictured), who died at 30, was a party animal who lived her life in the public eye, most recently as the fiancée of D-list celebrity Tila Tequila. Lilly, 94, made her biggest waves not with clubbing but philanthropy -- most famously with her $200 million donation in 2002 to the Poetry Foundation, a bequest so eye-popping that the controversy surrounding it hasn't yet died down.But scratch the surface, and similarities emerge. Johnson and Lilly were both heiresses to major corporate fortunes: Johnson & Johnson (JNJ) and Eli Lilly & Co. (LLY). Both had massive personal wealth tied up in trusts they couldn't access directly. And both fortunes illustrate a yearlong Congress-induced quirk that could greatly benefit the heirs to anyone who dies this year, cost the U.S. billions of tax revenue, and drive estate-planning lawyers crazy.
A Tale of Two Heiresses
When Casey Johnson died, the frenzied tabloid coverage of her death overlooked a detail of crucial importance to her family's lawyers and accountants: time of death. Johnson was found at her West Hollywood home on January 4, apparently a few days after she died. Her last Twitter post was December 29. No one, not even Tequila (née Nguyen), reports having seen Johnson since then.
In accordance with California law, the date of death is certified as the day the body is found. Determining an exact time of death is a highly unreliable science, especially if several days or more have passed since someone's last appearance. Had Johnson been found at the end of 2009, her estate -- a trust that her family had recently cut off -- would have been subject to a tax that is suspended this year.
But Lilly died on December 31, so her estate, estimated at more than $1 billion, is subject to significant taxation. Aside from the Poetry Foundation bequest, Lilly gave away some $800 million -- almost as much as she was finally worth -- the bulk of it put in trust and administered as a foundation named after her.
Lilly was unmarried and had no children, so her fortune will be inherited by nieces and nephews who run the foundation. But the big wrinkle here stems from a 1981 declaration of mental incompetence, when Lilly, then 66 and suffering deep depression, was placed under guardianship. Lilly's mental health improved with drugs -- most notably Prozac, made by her family's company -- but when her health failed in 2006, an investigation revealed extensive mismanagement by her guardian, who was replaced by a niece and nephew.
Lilly's estate should still be able to make sizable philanthropic bequests, but it's unclear how that will take place, or how estate taxation will affect those bequests.
Now You Tax It, Now You Don't
The strange case of the disappearing federal estate tax dates to a law Congress passed in 2001, ruling that the tax on anyone whose total fortune at the time of death was valued at or above a certain amount -- currently $3.5 million -- would be repealed for several years. That several-year gap has shrunk to a single year, and by the end of 2009, Congress had not extended that period.
As a result, there's effectively an estate-tax hiatus between January 1 and December 31, 2010, so a fortune above $3.5 million, usually taxed at 45%, will not be taxed at all this year. (The tax affects approximately 5,500 estates annually.) Next January 1, the tax returns with a vengeance: a 55% tax on estates of more than $1 million.
That makes estate planning far more complex, especially for wealthy families grappling with end-of-life decisions for their loved ones. "I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," Joshua Rubenstein, a lawyer with Katten Muchin Rosenman in New York, told The Wall Street Journal at the end of December. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"
But those questions come as small comfort for Charles Leslie, whose business- and life-partner of 48 years, Fritz Lohman, died on December 31 at 87. Lohman, a New York City real-estate magnate and a pioneering patron of gay art, was worth $10 million when he died. Leslie, his sole beneficiary, will be taxed heavily -- a fate he would have avoided had Lohman died 13 hours later.
But that doesn't mean estates of a certain value won't be taxed at all. There's also a repeal of estate tax's "step up basis" rules -- inherited assets are valued at the person's time of death, no earlier or later -- replaced by "carry-over basis" rules, by which assets are valued at what the deceased paid for them. If that information isn't readily available, then research will be necessary to estimate the basis. The result, South Florida estates attorney David Shulman recently explained, is a tax increase on estates valued between $1.3 million and $3.5 million. Add to that the state taxes, and a potential increase in capital gains taxes, and that one-year repeal suddenly doesn't sound so peachy.
An Estate Tax in 2010 After All?
Congress's inaction has left estate-planning lawyers stunned. "Everyone expected Congress to act, but they never did," says Donald Hamburg, a trust-and-estates partner at Golenbock, Eiseman, Assor, Bell and Peskoe. "Year after year has come and gone, and the tax never got repealed." Seven bills are pending in Congress to bring about the repeal, and the Obama administration has signaled that it wants a federal estate tax for 2010.
Hamburg expects legislation to reverse the estate-tax repeal to be debated once health-care reform is finished -- as early as February, he hopes. He and his colleagues are advising clients to expect that the free ride won't last, and that any new Congressional legislation will be retroactive. "There are two wars going on, a significant budget deficit, and a health-care bill costing billions of dollars, and the estate tax is a revenue-raising one. It may be unpopular in certain quarters, but taxing the rich is better than taxing the poor."
As for Johnson, the fate of her estate is up in the air. Her 3-year-old adopted daughter, Ava Monroe, is in the care of Johnson's mother, Sale. Tequila is reportedly seeking the girl's legal custody.
UPDATE: This version corrects the spelling of Donald Hamburg's employer, and clarifies the minimum threshold for estate taxation in 2009. It affects the total value of an estate at the time of death, not a person's annual income.
Casey Johnson and Ruth Lilly: A Tale of Two Heiresses, Tax Loopholes, and Tequila