Tag Archives: federal estate tax

President Obama makes “permanent” estate tax temporary again.

President Obama proposed 2014 budget:  Changing the Estate Tax and Gift Tax Rates AGAIN!!!


From January 1, 2001 through December 31, 2012,  Congress seemed intent on making planning for death more complicated than it already is by  creating a series of “temporary” estate tax laws.   These temporary tax rates and estate tax and gift tax exclusion amounts created turmoil for software companies, lawyers, accountants and ordinary people.

As part of the 2012 “Fiscal Cliff” compromise, President Obama signed legislation that appeared to make permanent the 2012 estate tax exclusion amount of $5 million for estate and gift taxes and a top estate tax rate of 40 percent.    The exclusion amounts would be indexed for inflation.  The statements from Congress and the President made it seem we FINALLY had permanent rules regarding federal estate and gift taxes.  Software companies could stop revising code.   Families could make permanent plans for death.  

So much for compromise.  The Obama “Green Book” Budget for 2014 puts us back in the guessing game about estate and gift tax rules.     Page 138 of the budget has these words:  “Beginning 2018, the proposal would make permanent the estate, GST and gift tax parameters as they applied during 2009.  The top tax rate would be 45 percent and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes. There would be no indexing for inflation.”

You can find out more here:


Dying in the year 2010: Why Is It Different?

On January 1, 2010, the rules about taxing inherited asets changed.

To understand why dying in the year 2010 is different from dying in any other year, you must understand how inherited assets are taxed.

  • Unless someone dies in 2010, all of their heirs will inherit property with a “stepped-up basis.”    Stepped-up basis is an Internal Revenue Service term describing the tax basis of inherited property as equal to the fair market value of property on the date of death.   When inherited property is sold, the beneficiary uses the stepped-up basis to calculate and report capital gains.   If the sales price exceeds the stepped-up basis, the beneficiary reports the profit as a capital gain on his or her tax return and pays the necessary capital gains taxes. 
    • Example:  Sue inherited a house from her mother, who bought the house fifty years ago for $25,000.   On the day her mother died, the house had a fair market value of $500,000.  Sue sold the house six months later for $525,000.  Sue reported a capital gain of $25,000, the difference between the stepped-up basis and the sales price. 
  • Unless you die in 2010, the decedent’s estate is required to pay estate taxes if the fair market value of all the property on the date of death exceeds the federal estate personal tax exemption allowance for that year.  If estate taxes are due, the estate representative pays the estate tax and then distributes the remaining assets to the heirs.     
    • A surviving spouse receives an unlimited federal estate tax marital exemption.  No federal estate taxes are due, even if the fair market value of the inherited property exceeds the federal estate tax personal exemption allowance.  Any inherited property sold during the lifetime of the surviving spouse uses a stepped-up basis to calculate capital gains.   
    • Estate planning documents may include a reference to the federal estate tax personal exemption allowance as a way of reducing estate taxes or allocating assets between different trusts and beneficiaries.    They may determine how much a surviving spouse or child inherits. 
    • The federal estate tax rates for the year determine how much tax is due.

    What will be different if someone dies in the year 2010?

    In 2001, Congress passed a bill known as The Economic Growth and Tax Reconciliation Act of 2001.  Section V of this bill specifies how inherited assets are taxed between the years 2002 and 2011.

    Years 2002-2009
    For the years 2002 through 2009, the Act changed the amount of the federal estate tax exemption allowance as well as the federal estate tax rate.  

    • The federal estate tax exemption allowance increased from $1 million to $3.5 million.
    •  The federal estate tax rate decreased from 55% to 45%. 

    The Act resulted in fewer estates being subject to the estate tax and decreased the amount of taxes due for those estates that were subject to an estate tax.  Most important, the Act did not change the fundamental way in how inherited assets are taxed. 

    Year 2010  
    If you die in 2010, there is no estate tax.  There is no federal estate tax exemption allowance and no federal estate tax rate schedule. You could have an estate worth hundreds of millions of dollars and no estate tax is due.  The elimination of the estate tax does not mean there is no tax on inherited assets.  The Act requires the beneficiaries, not the estate representative, to calculate and pay taxes on inherited property using either a stepped-up basis or a carryover basis.   

    • The estate representative must calculate and document the carryover basis of inherited property.    The term “carryover basis” means the tax basis is the original cost paid for the property.   The greater the increase in value of the property between the date of purchase and the date the beneficiary sells inherited property, the more taxes a beneficiary pays.
      • Example.  Sue inherited a house from her mother, who bought the house 50 years ago for $25,000.   On the day her mother died, the property had a fair market value of $500,000.  Sue sold the house six months later for $525,000.  Sue reported a capital gain of $500,000, the difference between the carryover basis (the original price of the property) and the sales price. 
    • An estate representative must also calculate the stepped-up basis of the decedent’s property. 
    • The estate representative can only distribute a limited amount of assets using a stepped-up basis. 
      • $1.3 million can be distributed to beneficiaries with a stepped-up tax basis. 
      • $3 million of assets can be distributed to a surviving spouse with a stepped-up tax basis. 
      • All other inherited property must be distributed to beneficiaries using the carryover tax basis.
    • All beneficiaries must calculate and pay capital gains when they sell an inherited asset.  The estate representative will provide documentation the beneficiary can use to document on their tax return whether capital gains are calculated using a stepped-up basis or a carryover basis. 

    Year 2011
    If you die in 2011 or any year thereafter, the Economic Growth and Tax Reconciliation Act of 2001 is repealed.  The rules about estate taxes and the tax basis of inherited property revert back to the rules in existence in 2001.    Heirs inherit property and calculate capital gains using the stepped-up basis.  The federal estate exemption allowance reverts back to $1 million and the maximum estate tax rate reverts back to 55%.   

Because the rules on the taxation of inherited assets are so fundamentally different for someone who dies in 2010, no one thought Congress would allow the existing Economic Growth and Reconciliation Act of 2001 to remain in effect.  In December, the House voted to provide a permanent federal estate tax exemption of $3.5M and a maximum federal estate tax rate of 45%, effective January 1, 2010.   The Senate could not agree on what the amount of the federal estate tax exemption allowance and the rate of the estate tax should be and did nothing.  Senator Backus was quoted as saying it was not a priority within the Senate to change the existing 2001 legislation, but has implied he will make it a priority in 2010.

What does all of this mean if you die in 2010?

What began as a debate on how much wealth someone could pass on to their heirs free of estate taxes has evolved into a mess for everyone who dies in 2010, not just the wealthy.

  • Good records just became more important.  In order to calculate the carryover basis for inherited property, the estate representative will need to know the original cost of all of the property.   Just imagine documenting stock splits or the cost of a home bought fifty years ago.
  • Existing estate planning documents that make choices based upon the amount of the federal estate personal tax exemption allowance won’t work.  There is no federal estate tax exemption allowance in 2010.   You may accidentally disinherit a spouse or your children!
  • If the value of your estate exceeds $1.3 million, your estate representative will determine who inherits assets using a stepped-up basis or a carryover basis.  The unlimited marital tax exemption allowance does not exist for surviving spouses.  A surviving spouse may pay more in capital gain taxes during their lifetime if their spouse dies in 2010 than they would pay if he or she died in any other year.
  • It will be a tough year for estate representatives.  They must determine the intent of existing planning documents or existing intestate laws versus the need to follow the rules for taxing inherited assets in 2010.   It will be a good year for estate planning litigators. 

The Senate has stated it intends to pass new legislation with the intent to make the legislation retroactive to January 1, 2010.   Every day that passes without some type of resolution compounds the problem.  Do we need to change our estate planning documents?   What happens with software or web sites providing information about estate taxes?    Can we die retroactively?
If you know you won’t die in the year 2010, you may not want to call your financial planner or your estate planning lawyer.  Otherwise, it may be wise to call and get their advice and input on how to deal with the mess Congress has created for everyone.

House of Representatives Passes H.R. 4154

On December 3rd the House passed H.R. 4154, the Permanent Estate Tax Relief for Families, Farms, and Small business Act of 2009 by a vote of 225 to 200.

The bill willl permently extend the tax exempton and the maximum tax at the current rate.  As of 2009, the estate tax deduction is set at $3.5 million for individuals and $7 million for married couples and the maximum tax rate on estate is 45%.



Estate Tax Update-H.R. 4154

Last week, Senator Pomeroy introduced  H.R. 4154.       The bill is scheduled for discussion and a vote later  this week.    

The language in H.R. 4154 is very short and to the point.   

This Act may be cited as the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009″.

The bill includes this language:   ” A bill to amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.”

If passed, the bill freezes the maximum gift tax rate and estate tax rate at the current 45%.

The Federal Estate Tax

Pay attention to the House of Representatives this week! It appears our government is getting ready to decide how to change the current federal estate tax laws over the next couple of weeks.

Will the House of Representatives recommend the 2009 $3.5 million federal estate tax exemption allowance become the permanent allowance starting in the year 2010? Or, will something different be recommended?

If the existing $3.5 million exemption becomes a permanent estate tax allowance, a married couple could use an A/B trust and pass $7.5 million to their heirs free of federal estate tax. Very few estates would be subject to any federal estate tax.

It may become more important to watch what the estate tax laws are in a particular state..and figure out what state not to die in. As the amount of the federal estate exemption allowance has grown from $1 million to $3.5 million over the last several years, some states have not have changed their inheritance or state estate tax laws. For some, the choice of residence may impact the amount of estate taxes due when someone dies.

A recent New York Times article listed 12 states that have some type of estate tax/inheritance tax. http://online.wsj.com/article/SB125694593227919879.html

I know someone who experienced the costly impact of New Jersey state inheritance tax laws. I’ve heard her say time and time again…”DON’T HAVE YOU PARENTS DIE IN NEW JERSEY!!!”

Stay tuned. We’ll be watching what is happening in Congress.. and keep you up to date on the latest developments.