The Temporary Death of Estate Taxes

As of the beginning of this year, the federal estate tax – like Monty Python's dead parrot – has ceased to exist. It is no more. But it is scheduled to return in 2011. With estate taxes in flux, it is highly recommended that you consult with your estate planning attorney to make sure your will meets your needs in this environment.

The bizarre part is that Congress knew for years that the estate tax was set to lapse in 2010. No one thought they would let it happen. Yet here we are. It is possible that Congress will attempt to re-instate the estate tax retroactively. Such an action, however, would face a constitutional challenge.

 

In 2011 the federal estate tax returns with a maximum rate of 55% and an exemption of $1 million (as compared to a maximum rate of 45% and an exemption of $3.5 million in 2009). There will also be a 5% surcharge in 2011 for estates over $10 million.

Although there is no federal estate tax in 2010, there is also no automatic step-up in basis for inherited assets. This means that if grandma leaves you IBM stock that she purchased for $30 per share and you sell it for $130 per share, you have to pay a capital gains tax on the $100 difference. Not all is lost in this regard, however, since there is a $1.3 million step-up between the original basis and the appreciation. Spouses inheriting assets get an additional $3 million step-up.

There is also no generation skipping tax this year. The gift tax with its $1 million exemption remains, but the rate has gone down from 45% to 35%.

Some states still impose an estate tax. Maryland and the District of Columbia have one; Virginia does not.

The problems caused by this situation are numerous. Many wills contain formulas that work well under the old rules, but lead to extremely undesirable results this year. Thus, it is important to review and update your will as the tax laws change. At this time, you may wish to consider such tactics as accelerated gifting. Finally, this is a good time to troll through your records to determine the cost basis of long-held investments.

Words of Wisdom

Either this man is dead or my watch has stopped.

--Groucho Marx