Greenville Estate Lawyer: “Unintended Consequences of Estate Tax Repeal”
December 29, 2009
In a prior post, I discussed the idea of stepped up tax basis, wherein upon death the tax basis of a person’s assets is set equal to the fair market value of the assets as of the date of death. Thus, if the asset is then sold after death for that same fair market value, there is no taxable gain.
Alas, with the laws expected to go into effect in 2010, this will no longer be true. In 2010, the estate tax is slated to be repealed. Along with the estate tax, the law allowing for stepped up tax basis upon death is being partially repealed. In 2009, all estate assets receive a stepped up basis. However, in 2010 there will be a limited step up in basis only to the extent of $1.3 million in estate assets. For transfers to spouses, there is an additional $3 million that will receive stepped up basis. But what does this mean in reality?
Well, according to this New York Times editorial, the year 2009 estate tax law, with its $3.5 million exemption per estate, imposes estate tax on approximately 5,500 estates per year. Of course, in the year 2010, the estate tax is repealed. But here’s the kicker. With the change in the tax basis rules planned in 2010, estates between $1.3 million and $3.5 million are going to be subject to capital gains taxes on appreciated assets which they are not subject to under year 2009 laws. How many estates is this estimated to be? The same New York Times editorial states that up to 70,000 estates could find themselves subject to this new capital gains tax in 2010.
Folks, thank your United States Congresspeople. Over the years, they have managed to convince us that it is immoral to impose a “death tax” on people when they die. They convinced people that the estate tax should be done away with. And in 2001 they managed to repeal the estate tax, albeit for only one year. And in the process, they will cause almost 13 times as many estates to incur taxes in 2010 than in 2009.
The above discussion does not even take into consideration the bookkeeping nightmare that the elimination of stepped up basis causes. In order to pay capital gains tax on the sale of an estate asset, people will need to determine what was paid for that asset, sometimes decades prior, when the people who would know best are not around to tell them. Attorneys involved in developing estate plans should be advising their clients of the importance of maintaining adequate records showing what was paid for various assets, and what improvements were made, or other transaction costs incurred to purchase an asset, as all these charges can have an effect on tax basis.
Needless to say, estate planners are rather up in arms at what is currently slated for 2010. Hopefully, the Congress will do something to these tax basis rules before too much damage is done in 2010. Stay tuned.