by Richard D. Freiman, Esq. of the Law Firm of
Berger and Raphael, LLP
[* Note: The following information is valid as of February 2010. Estate tax law may change in the months that follow. Please consult an attorney as to the current status of the law.]
Preoccupied with the rush to pass a health care bill, the Senate arguably committed an act of legislative malpractice by not dealing with the repeal of the federal estate tax (and generation-skipping tax) which took effect on January 1, 2010. By failing to do, the Senate has left estate planning attorneys and their clients in limbo, not knowing if the Congress will retroactively put the estate tax back in place for 2010 and what the law will be in 2011.
Last December, the House of Representatives passed a bill which would have put the estate tax back in place in 2010 permanently at the 2009 exemption amount (generally the amount that passes free of estate tax) of $3.5 million per person ($7 million for a married couple) with a tax rate of 45% for amounts above that exemption amount. The Senate Democrats seemingly were in favor of that legislation to some extent but the Senate Republicans wanted to raise the exemption amount to $5.0 million ($10 million for a married couple) with a tax rate of 35% for amounts above the exemption amount.
The Senate, under the control of the Democrats and the Majority Leader Senator Harry Reid (D-Nevada), should have handled the issue before the end of 2010 by passing a bill, negotiating with the House of Representatives in a conference committee, and then agreeing on a final bill and passing the new legislation in the House and the Senate and sending it to the President for his signature. However, as I stated earlier, with the Senate's attention diverted elsewhere, no legislation was passed, no bill was signed into law, and the people of this country were left wondering exactly when their Congress would see fit to deal with this.
Even though, at the moment, there is no federal estate tax in place, beneficiaries will not get their inheritances without be subject to some taxes under certain circumstances. Under previous law, when a beneficiary received an asset from an estate, the value of that asset would be its fair market value on the date of death or six months later (the "alternate valuation date"). This is called a "step-up" in basis of that asset, meaning that if the beneficiary later sold it, its basis for tax purposes would be that stepped-up basis, greatly decreasing or eliminating any capital gains tax.
Under current law, in 2010, there is a "modified carryover basis" in effect, which means that an asset's basis in the hands of a beneficiary, would be the decedent's basis (generally what the decedent paid for it plus any capital improvements). Assuming that the decedent's basis is less than the fair market value of the asset (which it generally would be), the beneficiary will have pay capital gains tax on that difference if the beneficiary sold it.
However, there will generally be a step-up in basis for the first $3 million in assets inherited by the surviving spouse and for the first $1.3 million in assets inherited by any other beneficiaries.
Further, under current law, in 2011, the estate tax will return with a vengeance, with a $1 million ($2 million for a married couple) exemption amount and a tax rate of 55% for amounts over the exemption amount. All assets would receive a step-up in basis.
The conventional wisdom (which may or may not be correct) is that Congress will pass legislation this year that will make the estate tax retroactive to the repeal date. The current legal wisdom (again which may or may not be correct) is that this retroactive legislation would be held constitutional if it reached the United States Supreme Court. However, no one knows what will happen and what the eventual outcome will be.
And the question we must ask ourselves is, what is the fair way to handle this. What if someone passes away in 2010 and his or her estate is subject to the current law and then the law is repealed? Should we take the effect on the beneficiaries into account? What about the people who want to plan their estate in 2010 and are unsure about what will happen in 2011?
Therefore, at this point, the best course of action is to contact your estate planning attorney to discuss your personal situation. I would also suggest that you also contact your Representative, our two Senators, and Senator Harry Reid, and ask them what is going on in Washington and when they plan to deal with this all important issue.
After all, they do work for us, they do get paid their salaries, and they don't have to be worried about being laid off.
Richard D. Freiman is an estate planning and tax attorney who is licensed to practice law in California and New York he is Of Counsel with the firm of Berger and Raphael, LLP. You can reach Richard at bnr@bergerandraphael.com or (877)369-9377 for a consultation regarding your Estate Planning or Tax needs.
The information is this article is for informational purposes only and does not constitute nor is it intended to constitute legal advice. Readers should not rely on this information in making decisions regarding their or others particular legal situation and are strongly advised to contact an attorney regarding same.
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