Is 2010 Really a Federal Estate Tax "Holiday"?

You may have heard or read that there is no Federal Estate Tax for estates of those who pass away in 2010. If you believe the news of a suspension of the Federal Estate Tax sounds too good to be true, your suspicions are well warranted. There are two major drawbacks of this Estate Tax "holiday":

(1) Your heirs will not receive a "stepped-up" basis for their inherited property, and

(2) The Estate Tax comes back with a vengeance in 2011, with a punitively low $1 million exclusion per person.

The "stepped-up basis" that was part and parcel of the Estate Tax scheme of years past allowed heirs to inherit property with a new basis based on the fair market value of the property as of the date of death of the decedent. For example, if you purchased a vacation home for $200,000 in 1990, your cost basis for that property would be $200,000. If you sold that property in 2007 for $300,000, you would be subject to capital gains tax on the $100,000 difference between the sale price and your basis. However, if you passed away in 2007 leaving that property to your child, and at the time of your death the property had a fair market value of $300,000, your child would inherit the property with a new "stepped-up" basis of $300,000. Therefore, if your child were to sell the property for $300,000 in 2008, he or she would incur no capital gains tax as a result of the sale because the sale price did not exceed his or her basis for the property.

This scenario is now drastically different for those dying in 2010. If you pass away in 2010, there would be no Federal Estate Tax on the property passing to your heir(s), however, he or she would receive "carry-over" of your basis for the property. The heir's basis would be your original $200,000 basis, meaning he or she would face the looming capital gains tax burden upon the sale of the property if it had appreciated in value. Keep in mind that this basis issue applies to all assets, not just real estate.

The second and most frightening problem with this Estate Tax "holiday" is that like all "holidays," it will come to an end. Under the current tax code, the Estate Tax is scheduled to return in 2011 like a grizzly bear that hasn't eaten for a year. In 2009, the Estate Tax excluded estates under $3,500,000. This $3.5 million is referred to as the "exclusion amount." In 2011, the Estate Tax returns, and the exclusion amount is only $1 million. This means that thousands more Americans will be subject to the Estate Tax and its oppressively high rates which can exceed 50 cents on the dollar. Factoring in that this tax must be paid by your heirs within nine months of the date of death, it is easy to see how this new lower exemption amount will deal a crushing blow to many small businesses and family farms.
There has been much speculation amongst estate planning experts as to whether Congress will act to amend the Estate Tax laws prior to the coming 2011 calamity, but no bill has passed both the House and Senate. Thus we're left with more uncertainty, and a very pressing need to address the estate plans of our clients whose assets may exceed $1,000,000 in value.
I would urge you to discuss these issues with an estate planning attorney, as there are many tools available to help minimize the tax burden on your estate and your heirs while protecting the assets you've worked so hard to accumulate.
If you have questions or would like discuss estate planning or other legal issues facing you and your family, please contact our office. We're here to help.
Gregory M. Halcomb
(317) 575-8222

***Please be advised that nothing in this blog should be considered legal advice. In order for me to give legal advice, it would be necessary for me to meet with an individual and discuss his or her unique situation before rendering a legal opinion or strategy.

Please also be advised that any comment or communication posted here will not be considered confidential and does not create an attorney-client relationship with me or our firm. Also note that I do not seek to practice law in any jurisdiction in which I am not licensed to do so.