Congress failed to act before the expiration of the federal estate tax structure that had been in place since 2001. As discussed previously on this blog, that means there is no federal estate tax this year, compared with 2009 when the tax fell upon estates worth more than the then-exempt amount of $3.5 million. What has also changed this year following expiration of the old law is the so-called “step-up” in basis of estate assets for capital gains purposes. This can have serious consequences for high-value estates from this year onward.
Previously, the basis of an asset in a decedent’s estate would be established as of the date of death, regardless of how long the decedent may have owned it. Thus, for example, a beach condo purchased in 1980 for $200,000 and sold during someone’s life for $300,000 would be subject to capital gains tax on the $100,000 gain over the $200,000 basis. However, if that same condo were owned by the 1980 purchaser at the time of death, and valued in the estate at the time of death at $300,000, the basis would be $300,000. In any subsequent sale, the estate or the heirs would pay capital gains tax only on the excess of the stepped-up basis of $300,000, representing a significant saving on capital gains tax.
Starting this year, however, the step-up is limited. The basis may be increased no more than $1.3 million for the aggregate of the assets in an estate. Also, the IRS will allow up to a $3 million basis increase in property transferred at death to a surviving spouse. After this year, the $1.3 million and $3 million basis increases will be adjusted for inflation.
The estate does not go away entirely. The tax comes back in 2011 on estates worth more than $1 million, down from the $3.5 million exemption available in 2009.
For persons with substantial assets, the 2010 estate tax gap and the uncertainty about new legislation in the future should prompt a consultation with an estate planning lawyer to ensure maximum flexibility in these changing circumstances.
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