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December 31, 2009
ESTATE TAX EXPIRES TONIGHT
First off, Happy New Year to you all!
This week I’d like to talk about the Federal Estate Tax that expires tonight. This 2001 tax provision will kick in tonight, barring some last minute move that would temporarily extend our current law until Congress is able to figure out what to do about it.
Back in 2001, when President Bush was in office, a tax law was passed that completely eliminated the estate tax, but only for the year 2010. This means that if you die in 2010, your estate will not pay any estate tax no matter how much money you have. This law has been dubbed by many as the Paris Hilton Benefit Act.
But, on January 1, 2011 the estate tax comes roaring back, exempting the first $1 million from tax with a maximum 55% top rate. As of today, December 28, there is no federal estate tax unless you have more than $3.5 million in assets and the current maximum tax rate is 45%.
A lot of rich people are starting to sweat at the thought of the repeal of the estate tax. Proper planning for wealthy married couples means that upon the first to die, the exemption amount (now $3.5 million) is left to the children or step children, and the surviving spouse gets the remainder. By utilizing this planning method, a husband and wife could have up to $7 million and not pay any Federal Estate Tax. But, if the first to die occurs on January 1, 2010, the will could be interpreted to mean that the children or step children get everything, and the spouse gets left out in the cold!
The second part of this 2001 law that will cause confusion and problems is that not all assets received from the deceased will have a step-up on basis. Historically, if you inherited an asset, whether it be real estate, stock or just about anything, your cost became what the asset was worth on the date of the decedent’s death. This is known as a step up in basis and allows the heirs to sell it tax free.
Tomorrow, it is the end of the step up in basis as we know it. First, only assets received by reason of death receive a step in basis. This affects a very common estate planning tool known as a life estate. A life estate is a transfer of real estate to, commonly your children, with you retaining the right to live in the property for your life. As of today, if you were to die, your children would receive a step up in basis, meaning they could sell the property tax free. But, starting on Friday, there will no longer be a step up in basis for a life estate. Your children’s cost will be whatever your cost was. This is known as a “carryover basis”. How are they going to figure out what your cost was?
Now, for those assets that your heirs receive by reason of death, the first $1.3 million will get a step up in basis and anything in excess of that amount will receive a “carryover basis”. This will be a boon for lawyers and accountants in trying to figure out what assets to apply to the $1.3 million and which ones to try and figure out what was the original cost.
I was sure that this Congress would act to eliminate this “Paris Hilton Benefit Act” prior to December 31, and as of today, it appears that I was wrong. In this day and time I don’t understand why Congress has elected to give multi-millionaires a tax break. Maybe you do?
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Friends of the Saugus Senior Center and is a member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions, please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org