Clarifying the Estate Tax Repeal

The 2001 Economic Growth and Tax Relief Reconciliation Act repealed the estate tax for individuals dying after Dec. 31, 2009. The law sunsets at the end of 2010, which means that the 2001 estate tax law returns for 2011.

What This Means: No estate tax is assessed on the value of assets for individuals who die during calendar year 2010. In 2009, taxable estates in excess of $3.5 million were taxed at a maximum marginal rate of 45 percent.

If Congress fails to enact new estate tax legislation and make it retroactive to the beginning of this year, an unlimited amount of wealth could be transferred by decedents that will avoid the estate tax and generation skipping transfer tax. There is an open question as to whether a law passed early this year and applied retroactively violates the U.S. Constitution.

Changes to Income Taxes: In 2009 and earlier years, recipients of inheritances received a “step-up” in their income tax basis because all of the assets were revalued as of the date of death. This rule is only in effect on a limited basis as long as there is no estate tax. The general rule provides that the recipient’s income tax basis will be the same as the decedent’s. Executors can increase the basis to fair market value up to $1.3 million. Property transferred to a surviving spouse can get a fair market value increase of as much as $3 million. There are also complicated provisions relating to basis adjustments for capital loss carryovers, NOL carryovers and other unused losses. A new exclusion for the sale of a primary residence owned by a decedent is effective in 2010 as well.

Gift Tax Changes: Gift taxes in 2010 have been modified rather than repealed. The exclusion from gift tax remains at $1 million but the tax rates have been reduced with 35 percent being the highest rate.

More questions on this or other estate planning issues? Post it on the EP Forum.

This entry was posted on Tuesday, February 16th, 2010 at 1:11 pm and is filed under CalCPA Buzz. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.