At the stroke of midnight on January 1, 2010 we were given a sort of gift by Congress-no Federal Estate Tax. As you may know, the estate tax has been on the books for years taxing the estates of deceased individuals with more than $3.5-million dollars. In fact, couples with more than seven-million dollars were also taxed upon death before any of the assets went to the heirs.
But for 2010 only, the Estate Tax goes away. It will be re-instated in 2011. During the next year however, the government will still have a financial stake in some of the estates with larger values, even without the tax.
Although we are without an estate tax currently, the Government has instituted a new capital gains tax and there’s a $1.3 million exemption for non-spouse transfers and a $3.0 million dollar exemption for spousal transfers. The rules are complicated and the results may be worse than simply having an estate tax. Under former law (with an estate tax) any assets a beneficiary received would receive a step-up in basis. Under current law, they will instead receive a modified step-up. For example, under current law, if John were to pass away leaving an asset worth $1,500,000 to his son, Sam, that he paid $100,000 for, Sam’s basis in the asset is now $1,400,000. Why? John’s estate can increase the basis of the asset by $1,300,000 so if Sam were to sell the asset, he wont have to pay as much income tax. Under former law, Sam would receive a step-up to fair market value of the assets value on the date of death.
Why is this important? What if John leaves a larger estate with more beneficiaries? We are only permitted to allocate $1,300,000 to non-spouse transfers. This will mean someone is going to pay a capital gains tax at some point. If a surviving spouse exists, the results could vary as well. What if the value of the asset is less than that which you can allocate?
There is a chance Congress could pass an Estate Tax during this next year. That also means lawmakers could try and make it retro-active to January first.
Bottom line: Planning opportunities continue to exist in light of the new changes to the law but this requires you to seek competent tax advice from estate planning counsel. Dont be fooled into thinking that the estate tax is not going to return as it probably will. However, if you can start the planning process now, you may get a jump on the new laws and create some great opportunities for the next generation.