2010 Estate Tax Repeal. Is it really as good as it sounds?

Once again, Congress has created a monster and waited too long to fix the mess! The year 2010 has been anticipated in Estate Planning circles ever since the 2001 tax act, signed into law by then-President George W. Bush (the “Act”). The Act called for a gradual reduction in the maximum rate of the federal estate tax from 55% to 45%. It also gradually increased the amount you could pass tax-free from$675,000 in 2001 to $3.5 million in 2009. That meant that a husband and wife could pass up to $7 million to their heirs completely free of estate tax if they both died in 2009.

However, in 2010 only, the Act completely repealed the estate tax-which sounds like good news at first…except there is a catch…. in order to pay for the lost tax revenue, the 2010 estate tax was replaced with an increased income tax on inherited property. Prior to 2010, heirs received inherited property with a “step-up” in basis. For instance, if you bought a stock for $1.00 per share (your basis), and it had increased to $10 per share prior to your death, your heirs could receive the stock at its current fair market value of $10 per share (their basis). When they sell the stock, they pay capital gain tax on the difference between their basis of $10 and the value they receive at sale. The net result was that the growth that occurred during your life was not taxed. This rule also applied to real property (i.e. your house).

In 2010, property that passes at death does not automatically receive this step-up in basis. Instead, each individual has a limited amount of property that can be “stepped-up” in value at the time of death. Property that does not receive this step-up value will be subject to income tax on all increase in value from the date you first acquired the property.

Interestingly, Congress tried to institute a similar law in the 1980s, but ended up repealing it because it was impossible to properly administer. Due to that past experience and the difficulty in calculating the tax, it was widely believed that Congress would change the law before January 1, 2010, but it didn’t. There is some speculation that Congress may yet act on this law and retroactively implement a “fix”, but we can never be sure.

That’s why you should consult with an expert whose job is to understand the rules and figure out the best planning strategies for you and your family.

Hunter Law Office, PC helps families protect their assets against loss from the unforeseen (and foreseen) events in life that inevitably take us off course. We are unique in that our practice is focused on each individual client… we design a plan around you and your family… because that’s what Estate Planning is supposed to be!