Estate Taxes - Where do you stand?

Before enactment of  the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), the estate tax was repealed for 2010, and was to be reinstated in 2011 at a lower exemption ($1 million) than was in effect for 2009 and at graduated rates reaching a top rate of 55%. The 2010 Tax Relief Act reinstates the estate tax retroactively to the beginning of 2010, except in those situations where the executor of an estate of a person dying in 2010 elects out of the estate tax. Under the 2010 Tax Relief Act, the new exemption is increased to $5 million and a top rate of 35%. These levels are in effect for 2010, 2011 and 2012 (the 2012 year has an inflation adjustment). In 2013, the exemption and top rates are scheduled to return to the levels under the law prior to the 2010 Tax Relief Act.

With the repeal of the estate tax under pre-2010 Tax Relief Act, there were certain limitations on the ability to step-up basis in property acquired from decedents dying in 2010. Without this step-up in basis to date of death values, heirs could have faced increased tax liabilities resulting from sales of inherited assets. The 2010 Tax Relief Act repeals the basis rules under the pre-2010 Tax Relief Act and allows for the step-up in basis rules that applied before 2010. In some cases, the issue of the step-up in basis has to be weighed against the potential estate tax. An executor of an estate of a person dying in 2010 can elect out of the 2010 Tax Relief Act rules if it is more beneficial to do so in a particular situation.

Generally, for someone who died in 2010 with an estate of $5 million or less, then the 2010 Tax Relief Act rules will be more than likely desirable: there will not be any estate tax and no limits on step-up in basis to date of death values. If a decedent’s estate exceeds the $5 million exemption, other factors must be considered and the assistance of one of our tax professionals would help you in this important decision making process.  The 2010 Tax Relief Act gives executors of estates of persons dying after December 31, 2009 and before December 17, 2010 and extension of time to file the estate tax to nine months after December 17, 2010.

Please call us with any questions and to discuss how this Act may impact your estate planning.

/posted by Wayne Sturgeon, CPA