It’s that time of year when ghosts and ghouls are on the mind. Three of my favorite Universal Monsters are the Mummy, Dracula, and Frankenstein. All three of these monsters are considered “undead” by most accounts. Two of these three are likely considered “resurrected” meaning that that had previously died. Specifically, the Mummy and Frankenstein can be generally considered to have died prior to becoming monsters.[1] There is an interesting question with regard to Dracula, as he has likely never died, but rather has been transformed from living, to undead.
These three monsters raise an interesting philosophical question as to how to tax the dead. Specifically, the federal estate tax levies a transfer tax on the transfer of wealth from a decedent to their heirs or beneficiaries. The question to ponder here is whether a person who dies, but is reanimated should be subject to the estate tax. Similarly, for Dracula, where a person does not technically “die” but becomes “undead” should the estate tax be applicable?
Introduction to the Estate Tax
Estate Tax: A Federal Transfer Tax Generally
The commonly misnamed “death” tax is actually the federal estate tax administered by the Internal Revenue Service (IRS) pursuant to Internal Revenue Code (IRC) §2001 and the subsequent statutes and attendant regulations. Generally speaking, federal transfer taxes are imposed on an economic shift of wealth. Most often this occurs by application of the federal estate tax, which is imposed on transfers occurring at the death of a wealthy individual (decedent).[2]
One of the distinguishing characteristics of transfer taxes, such as the estate tax, is that it is applicable to the transfer itself, as distinguished from income tax, which is applicable to an accretion to wealth received by a taxpayer. Because of this, transfer taxes are a type of excise tax imposed at the federal level on the transmission of wealth.
As noted, the federal estate tax is a tax on property (cash, real estate, stock, or other assets) transferred from deceased persons (decedent) to their heirs (beneficiaries). The tax is structured as a general tax on the transfer with a specific stated exclusion, effectively providing Americans with the ability to transfer a certain amount of property at death without application of the tax. Generally speaking, only the wealthiest estates pay estate tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level — $11,180,000 in 2018, and $11,400,000 in 2019.[3] However, this calculation is not quite so straightforward, as it requires a five-step process for determining the tax liability of the estate.
In computing the amount of Federal estate tax to be paid at death, the estate tax provisions of the IRC apply a unified rate schedule to the taxpayer’s cumulative taxable estate at death to arrive at a net tentative tax. The net tentative tax then is reduced by a credit based on the applicable exclusion amount (AEA), which is the sum of the basic exclusion amount (BEA) within the meaning of §2010(c)(3).[4] For estates of decedents dying after January 1, 2018, section 2010(c)(3) provided a BEA of $10 million, indexed for inflation, with a 2019 exemption value of $11.4 million dollars. The credit is applied first against the gift tax, on a cumulative basis, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax. Here, we will assume that there were no taxable gifts during these monster’s lifetimes.
Unified Credit: Reduction to Estate Tax Calculation
The basis exclusion amount or “applicable credit amount,” sometimes referred to as a decedent’s “unitary exclusion” is available to offset some minimum amount of estate tax to the extent that a portion is not used during lifetime to offset gifts.[5] For decedents dying (and gifts made) after 2017 and before 2026, the applicable exclusion amount used in determining the credit is $10 million (as adjusted for inflation – e.g. $11.4 million in 2019).[6]
To calculate the unified credit, the taxpayer starts with another number called the lifetime exclusion amount. That number rises every year for inflation, but it got a huge boost in 2018 due to the Tax Cuts and Jobs Act (TCJA) tax reform, reaching never before seen exclusion levels, starting at $10 million for years after 2017 but before 2026 and coming in at an annually inflation-adjusted number of $11.4 million for 2019.
The end result is that estates with a gross estate value of up to $11.4 million are effectively exempt from the estate tax, and any amounts within the estate in excess of that exemption value are taxed at 40%. So, in order to be subject to taxation, any of these monsters must die with at least $11.4 million dollars to their name. A high hurdle, but one that could possibly be met here.
The Mummy
A team of British archaeologists discover the mummified remains of Prince Imhotep, an ancient Egyptian prince mummified at his death. The archaeologists recite the scroll of Thoth, which brings the Prince back to life. From this, we can conclude that the Prince died during ancient Egyptian times, and was resurrected. This means that the Mummy: 1) died, and 2) was brought back to life. This becomes important because for the estate tax to apply, the individual whose estate is subject to the tax must actually die. We can conclude that, had the modern U.S. Estate tax been in place during ancient Egyptian times, the Mummy would have been subject to the estate tax at the time of death.
Now, we must determine the Mummy’s net tentative tax. Section 2001(b)(1) requires the determination of a tentative tax (that is, a tax unreduced by a credit amount) on the sum of the taxable estate and the adjusted taxable gifts, defined as all taxable gifts made after 1976 other than those included in the gross estate. Here, we have assumed no taxable gifts by the Mummy, so we simply need to calculate his estate value.
For this, let’s use King Tutankhamun (King Tut) as a proxy. King Tut’s tomb was discovered in the Valley of the Kings in Egypt in 1922 by Howard Cart and Lord Carnarvon, English explorers (tomb raiders for some). While King Tut is well known, his tomb was the smallest within the Valley of the Kings, meaning that the quantity of riches that he could have been buried with are necessarily less than what would be available to others, so King Tut can form a baseline of wealth for our Prince Imhotep.[7] The ancient artifacts and treasures that King Tut was buried with, while priceless today, demonstrate his wealth and seem to clearly indicate the applicability of the estate tax to the Mummy’s wealth at the time of death. While almost impossible to determine the value of King Tut’s wealth at the time of his death, if we take the gold in King Tut’s coffin alone, the 110.4 kilograms of gold, trading at a current value of $47,980 per kg, yields a hefty $5,337,764 in estate value.[8] The coffin alone gets us more than half way to estate tax taxability. It is not a far leap to conclude that King Tut would have been subject to the estate tax, and therefore by proxy, that the Mummy would similarly be subject to the estate tax at death. For sake of example, let us make a simplifying assumption that the Mummy’s estate would be worth $50 million dollars in 2019 dollars.
Second, §§2001(b)(2) and (g) require determination of a hypothetical gift tax – but since we have simplified the analysis to remove gift tax, we can skip this step. We then determine a credit, pursuant to §2010(a) and (c), equal to the tentative tax on the AEA as in effect on the date of decedent’s death. This cannot reduce the tentative tax below zero, so there are no refunds for unused unitary exclusion. Thus, we take the Mummy’s total estate value, as adjusted above, and apply the credit of $11.4 million dollars, to determine what his current 2019 estate tax liability would be, were he to die in 2019. Assuming an estate value of $50 million dollars, and an exclusion value of $11.4 million dollars, the Mummy would be left with approximately $38.6 million dollars in taxable estate, taxed at 40% giving rise to a tax bill at death of $15.44 million dollars (give or take). This is a pretty expensive bill for Prince Imhotep.
There is a question as to whether the Mummy actually owes this tax, as he comes back to life, and his death is not permanent. I believe that this is actually readily solved, not by the facts of his death, but by the tax code. The tax is levied on the transfer of wealth, not the act of dying. As such, the estate tax is a transfer tax, and to the extent that death is simply the catalyst for the transfer of wealth from the Mummy to his heirs, being reanimated would not absolve the Mummy from the tax. Therefore, he can’t unwrap a tax shelter to get out of the estate tax in this instance.
Frankenstein
Frankenstein poses a problem, as he is not one person who has been reanimated, but rather is several people who are dead, and obviously still dead (as the removal of specific body parts from various corpses would not give rise to a resurrection of a specific person).
As such, given the framework established above, all of the contributors to the Frankenstein monster would have died and therefore been subject to the estate tax. There is no way to know whether the individuals who have graciously given up body parts for Dr. Frankenstein’s experiment would have been wealthy enough to have the estate tax be levied. What we can say, is that the Frankenstein monster itself would never have been subject to the estate tax, as it was not a living being who “died” in the traditional sense, but rather several people, all of whom died. This is an instance where the parts would be greater than the whole from a taxation perspective, as only the parts could have been subject to the estate tax.
Dracula
It is interesting to note that act of “sucking one’s blood” does not appear to kill all victims, but rather transforms some from ordinary joe, to vampire. As such, if we make the simplifying assumption (without reviewing state law to determine the statutory definitions of “death”) that vampires are not “killed” but rather transformed, then there is a clear argument to make that Dracula was not, and should not, have been subject to the estate tax, as there was no death upon which to trigger the transfer of property, and therefore no excise tax.[9]
In fact, the transformation to vampire essentially makes Dracula “undead” meaning that his wealth will accumulate and appreciate in value during the entirety of his “undead” existence. This could be a valuable planning tool for vampires if they plan to hold assets for their entire existence. However, Dracula misses out on one of the significant benefits of the estate tax and transfer tax process by not dying, and therefore being unable to trigger a step-up in basis for his heirs.
Stepped-Up Tax Basis on Death
A beneficiary of a will or one who inherits property at the decedent’s death achieves a “stepped-up” basis in the property acquired.[10] This step-up in basis steps the basis of the property in the hands of the recipient up to the fair market value of the property at the time of transfer, effectively eliminating any taxable gain. Consequently, where the fair market value of the property appreciated after the date that the decedent acquired it, the gain which accrued prior to death will disappear from the income tax base at the time of the decedent’s death and, therefore, never be subject to federal income tax.[11]
For example, if Dracula purchased 100 Gold Coffins on January 1, 1931, for $100, and those same coffins were today worth $100,000, Dracula’s estate would include the full $100,000 value for estate tax calculation purposes; however, his beneficiary would receive the property with a tax basis of $100,000. Upon the sale of these coffins by the beneficiary, the first $100,000 will be excluded from taxation due to the increased, or “stepped up” tax basis. [Alternatively, if this rule did not exist, when the beneficiary sold the property with a carry-over basis of $100, assuming sale for $100,000 the beneficiary would be subject to tax on $99,900 of gains.] This creates a tax benefit because upon a sale of these coffins for more than $100,000 after Dracula’s death, whether made by the executor or a beneficiary, the $99,900 or more of gain accrued before death will not be recognized for federal income tax purposes because the tax basis will have been stepped up to $100,000.
As he cannot die (unless he takes a stake through the heart) Dracula has no ability to transfer assets to his heirs and avoid taxes on the appreciative gain that has accrued during Dracula’s possession of such assets. This is a limiting factor in Dracula’s ownership of assets, and for someone who can live for centuries, it could result in heavy capital gains taxes at the time of asset disposition. Dracula’s status as “undead” actually hurts his ability to transfer wealth and avoid taxes upon receipt by the beneficiary.
Conclusion
All in all, the Universal Monsters have some very serious considerations to undertake when making end of life financial decisions with regard to taxes. Their situations are unique and require some careful consideration and planning in order to ensure that the taxman doesn’t get his fangs into them.
[1] For an excellent discussion on the complexities of state law on the determination of death, see Adam Chodrow, “Death and Taxes and Zombies” 98 Iowa Law Review 1207 (2013).
[2] IRC §2001(a). There are two other types of wealth transfer tax: (i) gift tax; and (ii) generation skipping transfer tax. A gift tax may also be imposed at the time of a voluntary transfer of wealth to a donee by a donor during the donor’s lifetime. The third method of transfer taxation is the generation-skipping transfer tax system. These taxes are not relevant to this article.
[3] IRC §§2010(c) & 2505.
[4] There is potentially an expansion for this BEA pursuant to the deceased spousal unused exclusion (DSUE) amount within the meaning of §2010(c)(4); however, we will assume that all of these monsters were unmarried, so this will not be addressed.
[5] IRC §§2010 & 2505.
[6] IRC §§2010(c) & 2505.
[7] See “8 things you (probably) didn’t know about Tutankhamun,” HistoryExtra: The official website for BBC History Magazine, BBC History Revealed and BBC World Histories Magazine (available at https://www.historyextra.com/period/ancient-egypt/8-things-you-probably-didnt-know-about-tutankhamun/) (July 24, 2018).
[8] Current price of gold as of 10.7.2019 (available at https://www.bullionbypost.co.uk/gold-price/today/kilograms/usd/).
[9] For an excellent discussion on the complexities of state law on the determination of death, see Adam Chodrow, “Death and Taxes and Zombies” 98 Iowa Law Review 1207 (2013).
[10] IRC §1014(a).
[11] Id.