Have Your Estate Plans Reviewed

NOW is the time to have your estate plans reviewed. There are significant changes in tax laws effecting estates.

In 2009, one could pass $3.5 million at death tax free. For all amounts above $3.5 million there was a 45% death tax imposed. As of January 1, 2010, this rule has changed. This year there is NO death tax no matter how much the estate is valued.

In 2009, the property that passed at death transferred to the beneficiary with a basis of the fair market value of the property at the decedent’s death. For example, if a farmer purchased a farm in 1940. The farm had a basis of $100,000. When he died in 2009, he left the property to his son. At that time it had a fair market value of $2,000,000. His son would have received the property in 2009 with a basis of $2,000,000. If the beneficiary later sold the farm for $2,000,000, he would pay no capital gains tax.

For deaths occurring in 2010, this rule also changed. If the farmer died in 2010, his son would receive the property at the $100,000 basis. There are 2 exceptions to this rule. The personal representative can allocate up to $1,300,000 to increase the basis of assets in the estate. If the personal representative wished to apply all of this allocation to the farm, the basis of the farm could be stepped up to $1,400,000 ($100,000 + $1,300,000). If the son sold the farm for $2,000,000, he would be required to pay capital gains tax on $600,000.

The second exception applies when the descendent has a spouse that is a beneficiary. The personal representative can allocate up to $3,000,000 in addition to $1,300,000 to increase the basis of property inherited by the spouse. If the farmer had 2 farms, one with a basis of $100,000 and the fair market value at death of $2,000,000 and a second one with a basis of $1,000,000 and a fair market value at death of $4,500,000, the distribution of the increase in basis could be significantly changed. If the wife was the beneficiary of the second farm, she would receive the $3,000,000 increase in basis that can only be used by a spouse. She could also be allowed to use any and all of the $1,300,000 general increase of basis allowed for an estate. Therefore, in the example, the wife could have the basis of the second farm increased from $1,000,000 to its fair market value, $4,500,000. She would use the $3,000,000 allowed only to spouses and $500,000 of the general increase in basis allowed to an estate. This would leave $800,000 in basis to be allocated to the farm left to the son ($1,300,000 - $500,000). The son’s farm would then have a basis when he received his inheritance of $900,000. If he sold the farm at the fair market price of $2,000,000, he would pay capital gains on 1,100,000.

No one knows what the Congress will do to change the law. If Congress does nothing, in 2011 the law automatically changes again. Only $1,000,000 will pass at death tax free. For all amounts above $1,000,000, a 55% death tax will be imposed. However, the basis for the property that passes at death will return to the fair market value of the property at the time of the decedent’s death.

Your estate plan needs to address these changes in the law.