NO ESTATE TAX; IS IT REAL?

By Harold S. Small, J.D., CPA (inactive), AEP

12526 High Bluff Drive, Suite 300

San Diego, California 92130

858.759.4600

Almost a decade ago Congress (our elected Representatives and Senators) could not reach agreement on what to do with the estate tax. Some of them wanted to do away with the estate tax, some wanted to increase it, and some wanted to increase the amount that was not taxable, but still retain the tax. After a lot of negotiation (that is the polite way to describe it), they reached a compromise. The compromise was to provide for an increase in the amount that can pass free of estate taxes up to a level of having no estate tax. However, others had a different view. Not being able to make the tough decisions and make changes that were permanent in nature, they punted. They passed legislation that became part of the Internal Revenue Code that provided for increases in the value of assets that could pass free of estate tax, with no estate tax in 2010. They effectively repealed the law and an provided for the reinstatement of the tax structure in place some years ago to be effective January 1, 2011.

Most people thought that before 2010 new legislation would be proposed, passed and signed into law to make something permanent. One effort failed during the summer a couple of years ago. The last effort to effect a change was in December, 2009, but nothing happened. January 1, 2010 arrived and we had no estate tax, but we lost the benefit of a step-up in basis for many assets.

However, we have a new system in place this year because of Congress’ failure and inability to legislate in this area. According to the Tax Policy Center, some estates will have tax exposure with assets between $1,300,000 and $3,500,000. They have estimated that this will affect 50,000 U.S. taxpayers, whereas the structure in place in 2009 would have only impacted approximately 15,000 U.S. taxpayers. The tax cost relates primarily to the loss of the increased tax basis of assets.

The deal that was brokered to pass the law changes in this area in 2001 left us with a convoluted situation. Last year a new step-up in basis was available for appreciated assets, saving taxes on gains. However, the law that is now effective eliminates that step-up in basis and fully taxes gains while not imposing a tax on estates. This can be a very expensive situation and impacts taxpayers that have appreciated assets, especially those held for many years. While real estate and other assets suffered a loss of value over the past year and a half, many people still hold assets acquired many years ago and that have a substantial gain that has not been taxed. Under the law that is now effective, each person (or his/her heirs) in that position will be exposed to and will probably have to pay a tax liability associated with the growth or appreciation in value. The only saving condition is that current law allows a $1,300,000 exemption from the tax on appreciation. An executor/administrator has the ability to select after death which assets to which the exemption is to be assigned to maximize the tax value.

There has been talk of a law change in early 2010, but it does not appear that new legislation has been introduced.

The advice of your attorney and/or Certified Public Accountant should be sought prior to taking any action that may be irrevocable as this area of the tax law is considered to be in “in play” and subject to possible changes, some of which have been talked about as being retroactive in nature.

In addition, consideration should be given to removing from the file drawer the will or trust that was executed under the old law and reviewing to see what asset distribution provisions need change. Then you should call your attorney to seek his or her advice regarding what changes are needed to those documents to carry out your wishes and also give consideration to the law changes and the impact that they may have. See my article on “Family Asset Distribution Planning: that may be helpful to you as well as the article about “Estate Planning and Choosing an Attorney.” If you do not have a will and a trust, then call an attorney to schedule an appointment and have these documents prepared for you.

THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE READER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED HEREIN OR USE OF THE INFORMATION CONTAINED ABOVE. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92130 OR AT 858.759.4600.

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