2010 was supposed to be the perfect year to die, at least from an estate-planning standpoint: for the first time since 1915, there is no federal estate tax to pay by decedents who die during the course of the current year. If that sounds too good to be true,
it’s because it probably is. Unintended consequences could accidentally disinherit heirs, trigger capital gain tax issues, spawn countless lawsuits and turn one’s 2010 death into a nightmare for executors and estate planners.
Under a tax reform bill that Congress passed in 2001, the estate tax was slowly phased out. Each year since 2002, the amount exempted from estate taxes has increased and the tax rate has decreased to reach taxation zero for the current year. For 2009, estates valued at less than $3.5 million were exempt from the tax and the higher marginal tax rate on non-exempt estates was 45 percent. In 2010, all estates are exempt and the marginal tax rate is zero.
Here’s the problem: in 2011, the phase-out is “sunsetted” and estate taxes return to the 2001 level with a $1 million exemption and with the higher marginal tax rate set at 55 percent for amounts beyond the exemption. It could actually be above 60 percent for estates in excess of $10 million.
The downside is that in the absence of an estate tax the heirs will not receive a stepped-up basis on the property inherited. As an example, a property bought in 1930 for $20,000, and worth $2 million in 2009, assuming the owner died in said year, would have been subject to estate taxes on the $2 million value at time of death, but the heirs would have received that asset with a stepped up basis of $2 million. If the heirs then were to sell the property the next day(of course at the same 2 million as value), they will not be subject to any capital gain tax because there would have been no capital gain. This year, however, when there are no estate taxes, the heirs will not inherit the property with a stepped-up basis of $2 million but with its original basis of $20,000.
Having an estate tax that has changed each year for the past 7 years has already caused chaos on family businesses trying to plan for the future. Money that could have been spent on growing businesses, creating jobs, or providing better benefits to employees was directed instead to attorneys and accountants. It is estimated that small businesses spent $6 billion annually on lawyers, accountants and insurance premiums, just to minimize the effect of the estate tax.
In 2009, there were roughly 5,000 to 6,000 estates that were affected by the estate tax. That’s less than 1 percent of all estates. A married couple whose plans were done correctly could have shielded $7 million because each spouse was entitled to his or her exemption. Now that there is no step-up in basis, it is estimated that 60,000 to 70,000 estates will be affected (i.e, generate issues for the heirs in dealing with capital gains taxes). One of the big concerns is the administrative nightmare that results from losing the step-up in basis: really meticulous record-keeping of assets and transactions, spanning over two generations.
Congress, in an attempt to resolve the dilemma, may move toward new legislation before the end of 2010 or at least a retroactive tie over from the estate tax law applicable in 2009. Otherwise, the uncertainty of this situation may wipe out any planning that was already done. We are left to hope that Congress achieves some final compromise on the estate tax law shortly so that estate planning may be considered again with some degree of certainty and not as a mere guessing game.
1 Estate Tax is the levy imposed by the Internal Revenue Service on the assets (the Estate) of a decedent domiciled in the United States.
Cav. Piero Salussolia , Esq.
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