2010 and Estate Taxes

On December 5th I posted about the US House of Representatives passing legislation to extend the estate tax rate of 45% with an exemption on the first $3.5 million. (To read that post, click HERE).  As I mentioned in the AW post, the House bill was only half the equation, and the US Senate still needed to pass legislation, and then the two bill would need reconciliation.

With the US Senate deeply involved in the health care debate, and the the holiday recess, it did not seem likely a bill would be passed prior to the New Year. And, that did turn out to be the case. Expectation are the Senate will pass a bill in 2010 and make the tax rate retroactive to Jan 1, 2010.  Right now, unless a bill is passed with a retroactive date, there is no estate tax for 2010, and in 2011 the rates revert back to a $1 million exemption.

The NY Times article also points out an interesting situation in which many appraisers, and tax payers may not be aware of.  If there happens to be no estate tax in 2010, there will no longer be a step-up basis calculation.  The step up basis calculation means property is valued as of the date of death.  The loss of the step up in basis means there would be capital gains on the estate property. There is a $1.3 million exemption for individuals and $3 million exemption for couples for an artificial basis if there is no estate tax in 2010.  Anything beyond those numbers, capital gains will need to be calculated.

The NY Times article is a good, short reference piece about the estate tax situation. It also covers Roth Conversions/  The Estate Tax information is mentioned in the introduction area, and then in more detail about half way through.

AS previously mentioned, expectations are that a bill will be passed in the Senate and made retroactive to January 1, 2010, but until that happens the estate tax rate for 2010 is uncertain.

The NY Times article reports:

Jere Doyle, wealth strategist at Bank of New York Mellon, said the wealthy should not get their hopes up for an end to the estate tax. He pointed out that an estate did not have to submit its first tax bill until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year. This would wreak havoc on estate planning. Even if the Senate acted early in the coming year, it could still lead to a flurry of legal challenges on the constitutionality of reinstating a tax that had disappeared.

But there is a broader issue for moderately wealthy people. When a person dies now, the value of his or her assets gets a “step-up in basis,” which means for tax purposes the assets are valued on the day of death. Without an estate tax, this provision disappears, and the appreciated value is subject to capital gains tax.

The Internal Revenue Service will grant a $1.3 million “artificial basis” on assets of a single person and $3 million for couples if the estate tax disappears. But on the rest of the assets, the heirs will have to determine what the original cost was and pay the capital gains on the appreciated amount. For long-held stock that has split many times, this could be extremely difficult.

“If there is no estate tax in 2010, we have an income tax problem for a larger group of the population,” Mr. Kesten said. He estimated that the number of people affected would go from 6,000 to 60,000.

Still, most advisers and accountants expect that an estate tax will be reinstated, and this has pushed the wealthiest to find new ways to reduce its impact.

Click HERE to read the full NY Times article.