rev.JPG)
Beware of TV Commentators. A TV financial commentator made the morbid comment this weekend that 2010 is the year to die because there is no federal estate tax in 2010. What he ignored is that the arcane tax law provides that for many with money in 2010, they will actually pay more taxes with the repeal of the estate tax if they die in 2010. So, if you are single or in a second marriage, have between $1.3 and $3.5 million, don’t use dying in 2010 as a tax planning strategy.
Temporary Repeal. Under current law, effective January 1, 2010, the federal estate tax is repealed until January 1, 2011, when the federal estate tax returns with a vengeance with a tax on everything above $1,000,000 and up to a 55% rate. There is legislation pending which would bring back the estate tax in 2010 with an exclusion of $3.5 million for 2010 and the next several years. Congress will probably try to reinstate the estate tax retroactively to January 1, 2010, making the pull the plug strategy for 2010 even a worse idea. More on that in a future blog. The federal estate tax is a tax on the estate of everything above the exclusion amount, except that bequests to your spouse and to qualified charities are federal estate tax free. Also, many states
still have an estate tax and some have an inheritance tax.
Step Up in Basis Is a Big Deal. Before 2010, if someone died, their heirs received their property at the market value of the property as of the date of death of the decedent, or an alternate date. In tax talk, this means their “basis” in the property increased and was “stepped up” to current market value.
Dr. Sam Dies in 2009: No Death Taxes. Dr. Sam (a widower) bought a house in the suburbs for $100,000 which is now worth $900,000. The basis of Dr. Sam in his house is $100,000 (what he paid of it in 1981), plus another $100,000 in improvements, for a total basis of $200,000. If Dr. Sam sold his house for $900,000 and assuming it is eligible for the $250,000 homeowner exemption from capital gain taxes, his taxable gain is $900,000 less his basis of $200,000 less homeowner exemption of $250,000 or $450,000 in total ($900,000-$200,000-$250,000 =$450,000). Dr. Sam’s capital gain tax is a combined federal and state rate of about twenty percent (20%) times $450,000 or $90,000. If Dr. Sam had died in 2009, his daughter and sole heir Sally Sue would have received an increase in Sally Sue’s basis to $900,000, the market value of the house as appraised in the estate of Dr. Sam. Therefore, Sally Sue sells the house for $900,000 after expenses and because her basis was “stepped up” to the value in Dr. Sam’s estate, Sally Sue pays no capital gains because Sally’s stepped up basis is the same as what she sold it for. If Dr. Sam’s estate was less than $3.5 million, his estate pays no estate taxes.
Dr. Sam dies in 2010: $160,000 in Capital Gains Taxes. As a way of raising tax money to replace the revenue “lost” from the repeal of estate taxes, Congress also repealed step up in basis for property received from a decedent. So, if Dr. Sam died in 2010, when there is no step up in basis, Sally Sue receives the basis for Dr. Sam’s house of $100,000, assuming Sally Sue found proof of the $100,000. Sally Sue is very unlikely to find the receipts of Dr. Sam to prove that Dr. Sam made $100,000 of improvements. Sally Sue has not lived in the house and the five year period to qualify for the homeowner residence deduction of $250,000 has expired. Sally Sue’s capital gain in 2010 is $900,000 less $100,000 which is $800,000 ($900,000-$100,000=$800,000). With an estimated 20% combined federal and state rate, Sally Sue pays $160,000 in taxes on the sale of Dr. Sam’s house in 2010 if the house is not covered by the $1.3 million exemption. Sally Sue may experience a $160,000 tax increase due to the one year repeal of the estate tax.
Paper Chase Harassment. Sally Sue has the paper chase harassment of trying to find proof of what Dr. Sam paid for his house in 1981, what he paid for his Microsoft stock in 1982 and what grandmother paid for the family cabin in 1932 before she gave it to Dr. Sam. Finding proof of the basis in assets of a decedent will be very difficult. Sally Sue will have to document her claims of her basis to the IRS. The title companies, the stock brokerage companies, and most of the public will go crazy trying to figure out what parents, aunts, and uncles paid for things during their lifetime. But the anal record keeper gets to finally say with glee: “See, I told you never to throw out those papers from the thirties”.
Exceptions & Exemptions. Of course, it would not be the American tax law unless there
were exemptions and exclusions. There is a $1.3 million allowance for a step up in basis and an additional $3,000,000 spousal exemption. For people who are not US citizens or US residents with investments in the US, the exclusion is only $60,000. The net effect of this is that if you are single or married with an estate plan that does not capture the spousal exemption, you still have a death tax in the form of future capital gains for your heirs and your exemption is no longer $3.5 million as it was in 2009, but only $1.3 million plus proof of your basis in assets not covered by the $1.3 million. Since many people are widowed when older and most don’t have estates greater than $3.5 million, 2010 is the year when the taxes to be paid by their heirs on their inheritance increased up to $440,000.
Temporary Repeal. Under current law, effective January 1, 2010, the federal estate tax is repealed until January 1, 2011, when the federal estate tax returns with a vengeance with a tax on everything above $1,000,000 and up to a 55% rate. There is legislation pending which would bring back the estate tax in 2010 with an exclusion of $3.5 million for 2010 and the next several years. Congress will probably try to reinstate the estate tax retroactively to January 1, 2010, making the pull the plug strategy for 2010 even a worse idea. More on that in a future blog. The federal estate tax is a tax on the estate of everything above the exclusion amount, except that bequests to your spouse and to qualified charities are federal estate tax free. Also, many states
still have an estate tax and some have an inheritance tax.Step Up in Basis Is a Big Deal. Before 2010, if someone died, their heirs received their property at the market value of the property as of the date of death of the decedent, or an alternate date. In tax talk, this means their “basis” in the property increased and was “stepped up” to current market value.
Dr. Sam Dies in 2009: No Death Taxes. Dr. Sam (a widower) bought a house in the suburbs for $100,000 which is now worth $900,000. The basis of Dr. Sam in his house is $100,000 (what he paid of it in 1981), plus another $100,000 in improvements, for a total basis of $200,000. If Dr. Sam sold his house for $900,000 and assuming it is eligible for the $250,000 homeowner exemption from capital gain taxes, his taxable gain is $900,000 less his basis of $200,000 less homeowner exemption of $250,000 or $450,000 in total ($900,000-$200,000-$250,000 =$450,000). Dr. Sam’s capital gain tax is a combined federal and state rate of about twenty percent (20%) times $450,000 or $90,000. If Dr. Sam had died in 2009, his daughter and sole heir Sally Sue would have received an increase in Sally Sue’s basis to $900,000, the market value of the house as appraised in the estate of Dr. Sam. Therefore, Sally Sue sells the house for $900,000 after expenses and because her basis was “stepped up” to the value in Dr. Sam’s estate, Sally Sue pays no capital gains because Sally’s stepped up basis is the same as what she sold it for. If Dr. Sam’s estate was less than $3.5 million, his estate pays no estate taxes.
Dr. Sam dies in 2010: $160,000 in Capital Gains Taxes. As a way of raising tax money to replace the revenue “lost” from the repeal of estate taxes, Congress also repealed step up in basis for property received from a decedent. So, if Dr. Sam died in 2010, when there is no step up in basis, Sally Sue receives the basis for Dr. Sam’s house of $100,000, assuming Sally Sue found proof of the $100,000. Sally Sue is very unlikely to find the receipts of Dr. Sam to prove that Dr. Sam made $100,000 of improvements. Sally Sue has not lived in the house and the five year period to qualify for the homeowner residence deduction of $250,000 has expired. Sally Sue’s capital gain in 2010 is $900,000 less $100,000 which is $800,000 ($900,000-$100,000=$800,000). With an estimated 20% combined federal and state rate, Sally Sue pays $160,000 in taxes on the sale of Dr. Sam’s house in 2010 if the house is not covered by the $1.3 million exemption. Sally Sue may experience a $160,000 tax increase due to the one year repeal of the estate tax.
Paper Chase Harassment. Sally Sue has the paper chase harassment of trying to find proof of what Dr. Sam paid for his house in 1981, what he paid for his Microsoft stock in 1982 and what grandmother paid for the family cabin in 1932 before she gave it to Dr. Sam. Finding proof of the basis in assets of a decedent will be very difficult. Sally Sue will have to document her claims of her basis to the IRS. The title companies, the stock brokerage companies, and most of the public will go crazy trying to figure out what parents, aunts, and uncles paid for things during their lifetime. But the anal record keeper gets to finally say with glee: “See, I told you never to throw out those papers from the thirties”.
Exceptions & Exemptions. Of course, it would not be the American tax law unless there
were exemptions and exclusions. There is a $1.3 million allowance for a step up in basis and an additional $3,000,000 spousal exemption. For people who are not US citizens or US residents with investments in the US, the exclusion is only $60,000. The net effect of this is that if you are single or married with an estate plan that does not capture the spousal exemption, you still have a death tax in the form of future capital gains for your heirs and your exemption is no longer $3.5 million as it was in 2009, but only $1.3 million plus proof of your basis in assets not covered by the $1.3 million. Since many people are widowed when older and most don’t have estates greater than $3.5 million, 2010 is the year when the taxes to be paid by their heirs on their inheritance increased up to $440,000. Update your Plan. Will your estate plan survive 2010? In the estate plans we have been doing in the last several years, the 2010 temporary repeal is covered. But, many other plans do not cover this. There are new planning opportunities to take advantage of this one year repeal of the estate tax. Call us to go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.
No comments:
Post a Comment