A little less waiting, a little more action? Inheritance tax planning under lifespan uncertainty

To reduce the inevitable tax burden resulting from a bequest, taxpayers can make use of preceding inter-vivos transfers. This transfer procedure is naturally characterized by uncertainty concerning the donor’s remaining lifespan. Starting with the well-known ascending allocation structure under certainty, we establish an advanced tax planning approach and analytically analyze the impact of lifespan uncertainty on the pattern of the optimal wealth transfer process. This allows us to identify an additional effect that is relevant in the context of inheritance tax planning, to which we refer to as the progression clause effect. Its basic impact is that a transfer step loses relevance as the risk of not surviving the subsequent transfer step increases. Focusing on a model with three planned transfer steps, we find that this effect potentially leads overall to a significant increase in the relevance of the initial transfer step. As a consequence, replacing the known ascending structure of the transfer amounts by a U-shaped structure could be a reasonable strategy. This is especially true for donors of an advanced age. This finding is essentially also corroborated for strategies involving more than three transfer steps.