Thursday, 18 July 2024

Estate planning: Death of the estate tax

On Jan. 1, 2010, after nine years of steady decline (under 2001 enacted legislation), and despite last ditch Congressional efforts to revive it, the estate tax died.

More precisely put, the estate tax died, only to be resurrected come Jan. 1, 2011, if not sooner, when it returns with a vengeance, under the 2001 enacted federal law.

What does this mean for you?

Since 2002, the estate tax has provided a tremendous income tax benefit for many heirs of middle class persons whose estates never paid any estate tax.

Last year, as a general rule, only decedents with net worths over $3.5 million paid estate tax. So long as the estate tax was in effect, however, inheriting property at death was often advantageous as it usually meant a so-called “step-up” in basis.

That is, until now, inherited property has received a basis equal to the appraised death value – basis is what determines whether any capital gains is owed on the property at sale.

A stepped-up basis wipes out any appreciation in value that occurred between the date of the deceased owner’s purchase and the date of the purchaser’s death.

For example, if someone purchased their home in 1975 for $100,000 and died in 2009 when the property had appreciated and was appraised at $450,000, then the inheriting beneficiaries/heirs would receive a “stepped-up” basis of $450,000 (not $100,000).

Accordingly, the heirs could later sell that property for a price at or below $450,000 without triggering any capital gains (income) tax.

The step up in basis is a gift of the estate tax which allows persons inheriting property of a decedent to receive a “date of death” basis regardless of whether that deceased person’s estate paid any estate tax or not.

Usually, when the property has been held a long time, the date of death basis exceeds the original purchase price. Now, with no estate tax, there is no legal authority for the date of death basis adjustment.

Remarkably, after nine years of impending uncertainty over the slated 2010 repeal, Congress was unable to agree on what to do with the estate tax, even just for 2010.

This has defied all expectations in the legal community, which expected a last-minute enactment to freeze the estate tax in its present state, at least for 2010.

It is not impossible, however, that belated legislation could be enacted in 2010 on a retroactive basis to Jan. 1. While controversial, retroactive taxation is not without precedent.

Otherwise, come Jan. 1, 2011, the estate tax will be resurrected with the old 2001 threshold, of $1,000,000, i.e., estates with net worths greater than $1,000,000 will be taxed on the excess at close to 50-percent rates.

Once again, many upper middle class families may need to be concerned about estate taxation planning.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.

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