Senate Lets Estate Tax Expire - That Means Higher Capital Gains Taxes for Less Wealthy Heirs
The estate tax expires next week!! Hurray!! Hurray!! Right?
Not for the less wealthy heirs - those who will inherit from relatives with less than $3.5 million per person, or $7.0 million per married couple.
Since it appears that Congress has failed, and will fail, to act before January 1, 2010, the estate tax goes away for the calendar year 2010. That's reason to celebrate for a few thousand very wealthy families. But, there are tens of thousands of taxpayers of more modest means who will pay capital gains taxes on inherited assets that are inherited during the period for which there is no estate tax. The personal representatives or executors of those estates will also face additional and confusing administrative burdens.
That's because for the year 2010, the estate tax is replaced with a 15% capital gains tax on inherited assets that are later sold. Based on the current law that expires December 31, 2009, someone inheriting property when someone dies gets a "step up in basis" for the property inherited. Thus, the value of the property for determining the capital gains tax to be paid upon the sale of the property is calculated based on the value at the time it is inherited — not when it was originally bought by the decedent.
The law that is eliminating the estate tax effective January 1, 2010, also eliminates the step-up in basis rules, for all but a few people. So, people who inherit estates in 2010 will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains (plus an additional $3 million for assets transferred to a surviving spouse).
Let's suppose that your parent dies and leaves you a home valued at $1.0 million and a stock portfolio purchased over the past 25 years at different times. Upon your parent's death, if you decide to sell those assets immediately upon your parent's death, you would have no capital gains tax on the sales, based on current law. However, if your parent dies on January 1, 2010, the new provisions require that you calculate capital gains based on the value of the home and the stock portfolio based on your parent's purchase price for the home and each of the stocks in the portfolio, not when your inherited the assets. Not only will that be a very expensive tax bill, the time you, or the executors of your parent's estate, will spend trying to ascertain the original price your parent paid for everything will be outrageous, and potential impossible in many cases.
Congress could have avoided this fiasco by extending the current estate tax for another year, or two, or permanently. Chief Tax Counsel for the House of Representatives Ways and Means Committee has estimated that extending the current estate tax law would affect about 6,000 estate. However, 71,400 estates will face potential new capital gains taxes if the estate tax expires on December 31, 2009, as it appears will now happen. Of those 71,400, tax counsel estimates that 62,500 of those estates would not have capital gains taxes or estate taxes if the 2009 law was extended. According to the Center on Budget and Policy Priorities, farms and business estates will constitute a disproportionately large share of those incurring the new tax.
The House of Representatives passed a bill in early December extending the 2009 estate tax rules permanently. (An exemption for the first $3.5 million owned by an individual, $7.0 million for a married couple, and a tax rate of 45% on the amount of an estate exceeding those limits. The Senate's Democrats have indicated a desire to pass a companion bill in the Senate, but so far have been blocked by the Republicans who want a lower rate (35%) and a higher exemption amount ($5 million per person, $10 per married couple).
What Happens With a Retroactive Change
Many in the Senate, including Senate, including Finance Committee Chairman Max Baucus (D-MT), have indicated they will pass the legislation necessary to extend the current rules sometime in 2010, on a retroactive basis, effective January 1, 2010. That means for individuals who die between January 1 and the passage of the legislation, the estate tax rate will go from 0 to 45% upon the retroactive application of the legislation. There is sure to be lots of litigation and uncertainty. Sounds pretty messy. Forbes Magazine recently provided an overview of just how messy it could get. To read what Forbes says about the situation, click here. Whatever happens in 2010, there is sure to be some uncertainty over the estate tax. We'll keep you posted on our government at work on the estate tax issues.
For more information on the impact of the apparently temporary disappearance of the estate tax, you can review Kiplinger's "FAQs on the Death of the Estate Tax."
Posted by Randy Coleman at 12/23/2009 10:47 AM 
Categories: Probate,Gift Tax,Estate Planning,Trust Administration,Estate Taxes
Tags: probate capital gains taxes estate tax estate planning
Categories: Probate,Gift Tax,Estate Planning,Trust Administration,Estate Taxes
Tags: probate capital gains taxes estate tax estate planning
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