Estate Tax – A Moving Target
By Shane Flait © 2010

How your estate is taxed when you die is a moving target. This article summarizes where we are right now.

Right now – during 2010 – you can die and there’ll be no estate tax on your property. This result was built into the law back in 2001. At that time it was the consensus that the estate tax should be phased out and 2010 was the year it would be gone.

But ‘gone’ is not going to happen. Yes, it’s gone for 2010 but it’s coming back with a vengeance in 2011. Congress was given 9 years to create a permanent no estate tax law. It didn’t.

What we’re left with – if Congress doesn’t act otherwise – is a return in 2011 of the 2001 estate taxation scheme. That means your estate tax exemption will be only $1 million and the maximum federal estate tax rate goes back up to 55%.   

Most likely, Congress will up the 2011 exemption to about $3 million or so. But estate taxation will be with us for the foreseeable future.

Incidentally, for 2010 and 2011, the individual lifetime gift-tax exemption remains unchanged at $1 million. However, for 2010, the maximum federal gift tax rate has decreased to 35 percent. In 2011, the maximum federal gift tax rate will also increase to 55 percent.

A tax basis oddity for those who die in 2010

For the past years, all your holding when you died received a stepped-up basis – to the fair market value at the time of your death. That helped reduce the capital gains tax on your beneficiaries when they eventually sold whatever they inherited from you – since most things (like real estate) generally increase in value over time. 

But for 2010 – and only for 2010 - the assets of the estate of someone dying in 2010 will not be allowed a step-up in basis to their fair market value at the date-of-death. These assets receive a modified carryover basis, rather. They’re assigned a basis equal to the lesser of the decedent's adjusted basis in the assets or the fair market value of the assets on the date the decedent died.

Again, the deceased’s basis in those inherited assets you receive is usually a lot lower than their fair market value – especially for real estate. So being assigned the ‘lower’ of fair market or the deceased’s basis will usually mean having a lot more taxable gain built into what you receive – for when you choose to sell it.

In 2011, the old stepped-up basis rules come back into operation

Stay ahead of the game

You can’t count on the government to maintain predictable tax rules. That’s been made clear for some time now.

Your best bet is to arrange the transfer of your assets though irrevocable trusts or out of the reach of government. You’ll need to consult with a planner who can give you options that transcend the fickle whims of government taxation.

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com