The New Death Tax
Here we are in a new tax structure for estates. All the old estate funding formulas are no longer relevant because Congress actually let the estate tax repeal take effect for this year. For the first time since 1915, the United States has no federal estate tax! But the change does not mean that there are no tax concerns under the present structure. We now have to be even more concerned with capital gains taxes. Next year we are scheduled to go back to the estate tax law as it existed in 2000, namely smaller exemptions and higher estate taxes.
While estate taxes are briefly off the table, we have other kinds of taxes to be concerned with in these changing rules. Perhaps the biggest change is with the repeal of unlimited adjustments in “basis” which directly affects the amount of capital gains taxes to be paid by estates. The income tax basis of assets acquired from a decedent will not be adjusted upward to equal their values as of the decedent’s date of death. Rather, the basis of these assets will “carry over” the same value as was held by the decedent. This means that either the estates, or the beneficiaries who receive appreciated estate assets, will have a tax liability upon the sale of those assets.
In other words, the estate and beneficiaries are faced with the same capital gains tax problems as the decedent. If property increased in value from when it was originally acquired until it was sold, the owner has to pay capital gains taxes on the difference in the increased value.
Formerly, the gain, or increased value, prior to the decedent’s death was added to the original cost basis so that capital gains taxes were eliminated. Only gains on value from after the date of death to the time of sale were subject to capital gains taxation. There was no cap on the amount of gain that could be added to the original cost basis from the date of original acquisition to the date of death. For 2010, that rule is repealed.
Now, the decedent’s executor may allocate up to $1,300,000 to increase the basis of property. For example, a decedent’s child inherits land worth $3 million in which the decedent’s basis at death was $1 million. The executor may elect to increase the basis of the and to $2,300,000. The child would only hav to pay capital gains taxes on the $700,000 gain, or the difference between what the land is worth and the adjusted basis.
In addition to the $1,300,000 increase in basis, if the decedent was married, the decedent’s executor can allocate up to $3,000,000 to increase the basis of assets that the surviving spouse receives, either outright or through certain trusts for the benefit of the spouse.
These rules are set to change again on January 1, 2011. Unless Congress enacts new legislation, the estate tax exemption will be only $1 million, and the estate tax will increase to 55%! Keep an eye on developments as the tax component of estate planning has become more important than ever. Now may be a good time to have your estate planning documents reviewed by your attorney.
