23rd Mar 2012

In 2001 Congress enacted legislation gradually increasing in the federal estate tax exemption from $675,000 in 2001 to $3.5 million in 2009 and decreasing the top marginal estate tax rate from 55% to 45%. The legislation also included repeal of the federal estate tax for 2010 only.

When this legislation was enacted, estate planners predicted Congress would never allow this repeal of the estate tax to take effect. We continued to predict this right up to the time Congress adjourned at the end of 2009. We were wrong. The one-year estate tax repeal became effective January 1, 2010.

The quick fix we anticipated in early 2010, reinstating the 2009 estate tax law, has not occurred. Congress has been unable to agree on legislation, and the longer the federal estate tax repeal remains in effect in 2010, the less likely it is that Congress will retroactively reinstate the estate tax for 2010.

If Congress takes no action before the end of 2010, the estate tax will return beginning January 1, 2011. It will apply to estates of $1 million or more, with a 55% top marginal rate, and a 5% surtax on estates between $10 million and $17 million. If this happens, the Michigan Estate Tax, which has been inapplicable to decedents dying after December 31, 2004, will return, too. The politicians’ inaction may be intentional. The result of their inaction is a tax increase without the bad publicity of actually voting for an increase.

Carry-Over Basis

Along with the repeal of the federal estate tax for 2010 came the advent of “carry-over basis” for assets inherited in 2010. When the estate tax was in place, a beneficiary’s cost basis in inherited property was stepped up to the value of the property at the decedent’s death. Beneficiaries who inherit assets this year take the cost basis the assets had in the hands of the decedent during the decedent’s lifetime, usually the price the decedent paid for the asset.

The personal representative of the estate of a 2010 decedent may allocate a $1.3 million exemption to the decedent’s assets to “step-up” the cost basis of those assets. An additional $3 million exemption may be used to offset gain on assets passing to a surviving spouse. For estates with a total value of less than $1.3 million at death, carry-over basis is of little concern.

However, depending on the size of the estate and the degree to which the assets have appreciated, the capital gains tax paid when inherited assets are sold may well exceed the amount of federal estate tax that would have been paid.

Who Should Review Their Estate Plans?

  • Married couples with combined assets exceeding $1.3 million may want to review their estate plan provisions to insure that the available exemptions can be used to best advantage if death occurs in 2010.
  • Couples who implemented an estate plan when the estate tax exemption was greater than the value of their combined assets may want to review the appropriateness of that plan if the estate tax exemption drops to $1 million in 2011.
  • Finally, although carry-over basis only applies to assets of estates of decedents dying in 2010, you should continue to keep track of cost basis of all your assets in the event you dispose of those assets during your lifetime.

Written by Katherine Albrecht

T: 248-282-1064

E: kalbrecht@bhlaw.us.com

Federal Estate Tax Repeal by Lexology Article