Volume 5 Issue 3 -- May/June 2001
In recent discussions with the public, I have been told that the so-called Death Tax is dead. Recent Presidential statements seem to agree, but I am not so sure.
Yes, the estate tax is repealed, but only if you live until 2010 and then have the good sense to die during that particular calendar year. Thatís right. If you die in 2009 you will pay estate tax if your estate exceeds $3.5 million. If you die in 2010, you pay no estate tax, no matter how large your estate. For those dumb enough to die in 2011, the current estate tax that we now know and love is back in full force!
Donít believe me? Here is a quote from CCH, a leading tax publisher: "More precisely . . . the new law repeals the estate tax (aka, the death tax) for one year óĖ2010."
Between now and the optimum year of death, 2010, the top estate tax rate decreases from 55% in 2001 to 45% for years 2007 through 2009, but in 2011, the rate reverts to 55%, barring additional legislation.
In conjunction with the estate tax rate decrease, the life-time exemption will increase. The current estate tax exemption of $675,000 will increase to $1 million in 2002. So, for example, if Fred Furd dies in 2002 with an estate of $1 million in assets, there would be no estate tax due.
The exemption increases to $2 million for the years 2006 through 2008, and in 2009 (the second best year to die), it increases to $3.5 million. In 2010, the repeal year, there is no need for an exemption since there is no estate tax for that year. Unfortunately, for those who live on, the exemption for 2011 decreases to $1 million.
Planning your year of death, while not easy, is further complicated by another wrinkle; carryover basis returns for one year, 2010. Except for a brief spell of lunacy in the late 1970s, assets received from a decedent have always received a step-up in basis. This will remain true until 2010.
This is how the step-up in basis works. If his Dad willed Fred Furd, Jr., a farm worth $2 million on the date of his Dad=s death, and Fred, Jr., sells it for $2 million, there is no income tax on the capital gain even if his Dad paid only $100,000 for the farm. As the beneficiary of Fred, Sr.ís estate, Fred, Jr. receives a step-up in basis to fair market value on the date of his Dad=s death.
If Fred, Sr., dies in 2010, the step-up in basis is limited to $1.3 million ($3 million for a surviving spouse) on "certain assets." Most other assets will have a carry-over basis, which means the decedentís basis.
Thus, if Fred, Jr., inherited the same farm from his Dad in 2010 and sells it soon thereafter for $2 million, he may have a capital gain of $700,000 ( $2 million less $1.3 million). At a 20% capital gains rate, the income tax may be $140,000.
If Fred, Sr., dies in 2009, with a total taxable estate of less than $3.5 million (including the farm), Fred Jr., could sell the farm for the same $2 million, and there would be no income or estate tax. Why? The 100% step-up in basis is fully allowed in 2009, but it is only partially allowed in 2010.
Unfortunately, this is not the end of the problems created by this new law. Many wills and trusts may need to be redone to produce the desired results under the new law .
Rather than decrease the need for estate planning, as we all hoped, this legislation places a premium on careful planning, particularly for medium and larger sized estates.
I have made joking references to choosing a year of death so that a boring subject wonít be terminally boring, but Congressís disparate treatment of estates, determined solely by the year of death, defies reason.
Congressís reinstating the estate tax in 2011 at current rates, makes no sense after its prolonged attack on how "BAD" the estate tax is. However bad it is today, it will be back, maybe, in 2011.
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