January 4, 2010
It was eight years ago when a law was enacted to briefly repeal the estate tax for individuals passing away in 2010 and then bring it back in harsher terms for those passing after 2010. Many of us thought that the current Congress would undo the impending repeal and permanently or temporarily keep the tax at 2009 levels ($3.5 million per person exemption and 45% top rate), perhaps with inflation adjustments to the exemption amount. However, with the contentious fight over health care and the continuing recession taking priority, that has not happened.
Why? That's because estate tax repeal includes changes to the income tax basis rules for property acquired from a decedent. For example, if you receive real estate from a loved one who dies in 2010 with a value of $500,000 and a cost of $100,000, your cost for determining gain when you sell the real estate will be the same as the decedent, or in this case $100,000. Prior to 2010, your cost in the real estate would be the value at the decedent's death, or in this case $500,000. As a result of these income tax changes, some heirs could face higher combined estate and income tax costs if their loved one dies in 2010 rather than 2009.
Although Congress didn't address these transfer tax issues before year end, it seems likely that something will be done in 2010. The House has already approved a bill which would make permanent the estate, gift, and generation skipping transfer tax laws in effect for 2009. The Senate has not acted on this measure or on a bill which was introduced to permanently extend estate tax.
It seems fair to assume that some kind of compromise will be reached in 2010. Whether that will involve a retroactive undoing of the repeal and, if so, whether such legislation would pass muster if challenged, remains to be seen. What does seem likely is that the estate tax will continue sometime next year with a minimum exemption of $3.5 million per person and maximum top rate of 45%. It also seems likely that the step-up in basis rules will be preserved.
As always, we will keep you posted on any new legislation as it become available.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).