Ben Franklin famously said “but in the world nothing can be said to be certain except death and taxes.” While at least for the tax year 2010, Mr. Franklin may not be correct. When Congress enacted EGTRRA (the Economic Growth and Tax Relief Reconciliation Act of 2001), it included a 1-year repeal of the Estate and GST taxes and introduced a modified carryover basis regime in 2009, followed by a sunset provision that caused reversion to pre-EGTRRA law on January 1, 2011. The consequence of their actions is that this year 2010 there is no federal estate tax. Most estate planners presume that before the law sunset, a new estate tax law would be in place for the year 2010.
In late March, Dan L. Dunkin died. According to the New York Times report of June, 2010, his net worth is estimated to be $9 billion dollars, ranking him as the 74th wealthiest in the world. Because Congress allowed the estate tax to lapse for 2010, Mr. Dunkin’s heirs are quite happy. According to the article, Mr. Dunkin’s death could have resulted in $2 billion dollars in estate taxes being paid to the federal government but now his estate may pass to his heirs free of estate taxes.
As we are now in mid-June 2010, the likelihood of an estate tax being enacted in the year 2010 becomes less likely. Should the current law continue into effect for January 2011, the former federal exemption amount of $3.5 million dollars will be reduced to $1 million dollars.
A second troubling factor is carryover basis. Starting in the year 2010, we have tumbled into carryover basis requirements for property passed through estates. Our only experience with a carryover basis regime at death, was the ill-faded efforts to enact such a regime in the late 1970s. This change was so disliked that it was repealed before it went into effect. The objective of carryover basis is that rather than property acquired from a decedent having a new basis as was the rule for many years, such property is now subject to the same basis which the decedent had at the time of his death. When the new carryover basis rules come in 2011, each taxpayer is limited to $1.3 million dollars worth of a step-up basis. It will be the Executor’s job to allocate that to particular assets, like a house, and therefore to specific heirs. There is also a $3 million dollar step-up available for spouses for appreciated assets. But all other assets are to be valued at their original value.
The old step-up basis rules were a big tax break for heirs. What it meant is that if your father left you a house worth $1 million dollars that he purchased for $500,000 and then you turned around and sold it for $1 million dollars, you owed ZERO capital gains tax on that sale. This applied to all assets inherited at death. Now we will have to cope with carryover basis. The carryover basis rules are going to be difficult and time consuming to administer because the Executor will have to comb through the decedent’s records to determine date of death value. Unless a taxpayer can prove basis, it is presumed to be zero.
Perhaps before the end of the year, if Congress passes new legislation Ben Franklin’s famous quote might be correct as well for 2010.