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Federal Estate Tax Update for the year 2010

The Federal Estate Tax in the United States is a tax imposed on the transfer of the assets of a deceased person, whether such property is transferred via a will, trust, and contract or according to the state laws of intestacy. However, The Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the federal estate taxes for people dying in the year 2010.

Nevertheless, it is very important to be aware that this repeal is only in place for one year. This means that the provisions of this 2001 Tax Act will no longer be effective on January 1, 2011. In 2011, the federal estate tax is slated to be reinstated with a higher tax rate of 55% and an exemption amount of only 1 million per estate. (In 2009, the tax rate was 45% and the exemption amount was $3.5 million.)

This is not the only change taking place in the year 2010 as it relates to taxes and estates. In place of the estate tax in 2010, there is a capital gains income tax on an estate’s appreciated assets, such as stock, real estate and homes, when they are sold. Under the 2009 estate law, all assets got a “step up in basis” when someone died, meaning they could be sold right away with no taxes due. But under the 2010 law, all gains in excess of 1.3 million on assets passed to non-spousal heirs (an additional 3 million for certain gifts to a spouse), are now subject to the capital gains tax.

Therefore, for the year 2010, “step-up in basis” will be replaced by “carry-over basis” rules. For any amount inherited over 1.3 million, the heirs basis will be the smaller of the deceased owner’s basis or the date-of-death-market value. Furthermore, the basis of property given to the decedent other than his/her spouse within three years of death cannot be increased.

Thus do not be misled by the federal estate tax lapse for the year 2010. In addition, it is widely believed among estate planners that the Obama administration will try to overturn the repeal this year to restore the estate taxes retroactively, and to put back in place the system that applied in 2009 which included a 3.5 million dollar exemption for estate tax with a 45% tax rate for any estates in excess of 3.5 million.

If you have any further questions regarding the application of the Federal Estate Tax or any other questions involving estate planning and/or estate and /or trust administration, please contact Lisa M. Bitter, Esq.