Estate tax dead this year

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At first glance, not having an estate tax may seem innocuous — but it’s not.

Although the House of Representatives passed legislation Dec. 2 to extend the $3.5 million lifetime exemption, no action was taken by the Senate before it adjourned at the end of 2009.

The Economic Growth and Tax Relief Reconciliation Act of 2001 — which repeals the estate tax and generation-skipping transfer tax (GST) during 2010, and reinstates them in 2011 with a lower lifetime exemption and a higher top tax rate — is in effect.

“In 2009, $3.5 million (in assets) could pass from a decedent to heirs without tax — and they received a full-basis tax step-up,” said Kate Carr, CPA and senior manager at BKD LLP.

And the top tax rate was 45 percent.

So, any assets above the $3.5 million threshold are subject to the estate tax rate of 45 percent.

However, because of the full basis step-up, any subsequent liquidation by heirs didn’t generate an additional income tax.

But in 2010, instead of an estate tax, assets above the thresholds ($1.3 million, or an additional $3 million if it’s for a spouse) are passed to the heirs with a carry-over basis. So if heirs want to liquidate the assets, they will generate a capital gains tax.

This carry-over basis applies to anything that is liquidated, Carr said, such as collectibles, real estate, partnership and business interests, etc.

And during 2010, the lifetime exemption, or, technically, the applicable exclusion amount, is nonexistent.

That means that estates during 2010 are in limbo and heirs could be affected significantly.

For example, if a decedent leaves the maximum exclusion amount to his or her children and the rest of the estate to his or her spouse — but dies during 2010, the spouse could receive nothing because there is no exclusion limit this year.

“So in some ways this may end up hurting smaller estates,” Carr said. Most estates are less than the 2009 $3.5 million lifetime exemption, but the 2010 limitation of tax-basis step-up — of $1.3 million without a surviving spouse — will affect many estates.

“Estates greater than $1.3 million and less than $3.5 million will now incur capital gains tax that they would not have had to pay in the past,” Carr said.

“And it’ll be an incredible exercise to track all this down and determine the cost basis of assets,” Carr said. “How does someone know what their grandmother paid for stocks 40 years ago? And can they provide documents to prove it? That will be the real headache.”

For 2011, the estate laws change to a $1 million lifetime exemption, and the top tax rate climbs to 55 percent.

Congress could pass legislation that is effective retroactively, but there is debate as to whether retroactive change would be constitutional.

There’s also a chance that Congress will do nothing.

Through the years


• The maximum estate, gift and generation-skipping transfer tax rate capped at 45 percent

• Applicable exclusion amount for estate and GST tax set at $3.5 million

• The exclusion amount for gift tax is $1 million


• Estate and GST taxes repealed.

• Gift tax remains in force with maximum rate of 35 percent and exclusion amount of $1 million.

• Stepped-up basis for inherited assets repealed and replaced with “modified” carryover basis.


• “Sunset” provision forces return to pre-2001 Act Law, absent Congressional action to the contrary.

Source: CCH Inc. Editorial Staff Publication