Berman & Asbel, LLP

No estate taxes for now . . . but is that good for you and your family?

When I last wrote about estate taxation in December, the Congress was working on a reform of estate taxation that would freeze it at the exemption level that applied in 2009.  Like many items of legislation in Washington, this one stalled out too.  So now that we are in 2010, under the existing law, there is no estate tax.  If someone dies today with a gazillion dollar estate, there is no federal estate tax.  Is that a "WHOO HOO!" that I hear?  Sounds great, right?  Well, the government giveth and the government taketh away. 

Yes, there is no tax on an estate of someone dying now but there's a little nasty surprise.  The step-up in basis used for figuring capital gains is gone too.  What's that?  When an asset is sold, normally capital gain subject to tax is calculated by taking the sale price and subtracting the cost to acquire that asset - the basis.  The law long was that if an asset was held until death, the basis "stepped up" to be what it was worth on date of death.  This could be a really big break.  Suppose someone bought Google stock when the company was just getting started.  If they sold that stock themselves, they would have to pay capital gain tax on all the increase in value of that stock up to the time of sale.  However, if that stock was held until death, and then it was sold, all the gain that occurred before death was tax free.

This break also applied to the sale of a home that perhaps a parent had purchased years ago.

Well, now that the estate tax has gone away, that nice break in the capital gain tax rules has gone away too.  The rates for the estate tax that just disappeared were higher than the rates for capital gain tax but the majority of Americans were not paying estate tax anyway but a lot of folks were benefitting from that step up in basis.  Unless the rules are changed again, some folks may have to go back and figure out how much their parents or grandparents paid for stocks years, even decades earlier.  That could force a lot of folks to pay taxes who did not before not to mention the enormous pain in the butt of trying to figure out how much was paid to buy these assets so long ago - perhaps when the company had a different name or before a merger or before various stock splits. 

Well if Congress does nothing, this will only impact estates of people who die in 2010 because on January 1, 2011, everything reverts to the old rules from 10 years earlier.

If you are wondering what I think ought to be done,  I agree with Warren Buffett that there should be an estate tax but that the threshold amount of an estate which would be subject to it would be higher than the $3.5 million which was the exemption in 2009.  The exemption amount has not kept up with inflation over the years and this is a tax that was originally intended to only impact the "robber barons" but which has impacted more and more people over the years. So, to keep things in balance, the exemption should be automatically indexed to keep up with inflation.  At the same time, that step-up in basis should be permanently restored.  Well, that's my recommendation.  I will not be betting on Washington listening to me.

Readers should not solely rely on this note but should consult with a competent attorney licensed in their state. You can also find more information in my firm's websites on Family Law and Wills and Estate Planning and Administration.

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