On June 7, 2001, President George W. Bush fulfilled his promise to reduce taxes by signing a $1.35 trillion tax cut package known as the Economic Growth and Tax Relief Reconciliation Act of 2001. The tax package included a repeal of the estate tax, that kicked in this year. In the past, the estate tax exemption increased from $675,000 in 2001 to $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million for 2006 through 2008 and $3.5 million in 2009. Then 2010 rolls in, and the estate tax is gone.
What does this mean, you ask? First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million. So for most people, it means absolutely nothing. But wait, there's more.
Did you know that the having no estate tax in 2010 creates a capital gains "pitfall"? If you die in 2010, there will be no federal estate taxes; however, your heirs will have to pay capital gains taxes.
What? you say. I thought death was tax free in 2010. It is estate tax free; there won't be a federal estate tax. However, there will be federal and state capital gains taxes for deaths in 2010. There is a section of the Internal Revenue Code (1014) that says, essentially - when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value. For example, dad bought stock for $10, when he dies it is worth $100. Son inherits stock and sells for $100. His capital gains is $0 ($100 of value - $100 of basis =0). In tax parlance this is called a "step-up in basis".
Unfortunately, the law that eliminated the estate tax effective January 1, 2010, also eliminated the step-up in basis rules, for all but a few people. This “stepped-up” basis will only apply to $4.3 million in assets passing to a spouse and to $1.3 million in assets inherited by non-spouses. Heirs will be stuck using your original cost on all assets over those limits. As you can imagine, this will be a very expensive tax bill. In addition, the time you, or the executors of your parent's estate, will spend trying to ascertain the original price your parent paid for everything will be outrageous, and practically impossible in many cases. Somehow tax simplification got lost in this part of Bush's tax cut.
Then, if you make it to 2011, the entire tax is scheduled to be back with just a $1 million exemption and a 55% tax rate. In order to meet budgetary restrictions The Econcomic Growth and Tax Relief Reconciliation Act of 2001 contains a so-called “sunset” provision that brings the estate tax rules back in force in 2011.
Of course Congress could change the fiasco occurring in 2010. Most people agree that they can retroactively change the law to reinstate the estate tax. So, what's going to happen, you ask? Everyone has their own prediction, but nobody really knows the answer. Unfortunately, we will simply have to wait and see. Stay tuned.
