Posts Tagged ‘estate tax’

Time may be running out for large tax-free gifts!

Early this year, Congress passed a two-year revision of the Estate tax law.  One of the elements of this “two year wonder” is that the amount exempt from gift tax was increased to $5 million.  This meant that a married couple with proper estate planning in place could gift up to $10 million to heirs without any gift tax.  We have never seen an exemption of this magnitude.  The law as passed earlier this year expires 12-31-2012 when, if congress doesn’t act, it returns to $1 million. 

The congressional “super committee” charged with balancing our budget is seriously considering  changing this $5 million exemption back to $1 million THIS MONTH!

Rumor has it that for a variety of reasons, this is a compromise Republicans appear willing to accept.

The fear is that the change will take place in a bill which will get an immediate yea or nay vote in the senate.  If passed as expected, it will be enacted as part of a deficit reduction measure which will become law as of the vote….likely on November November 23rd (Thanksgiving is early this year).

Those who have been planning to make large gifts to take advantage of this $5 million exemption need to complete these gifts by November 23rd to be safe.  If you had planned on revising your estate plan to put a large gift into play before the end of 2012, I think you should move on those revisions quickly. 

Gifts of this magnitude should never be made without careful thought and planning.  If you have that sort of wealth and you wish to pass it to your heirs at some point, it would be extremely wise to get started on the planning.  If this pending reduction doesn’t become law this month and it is being considered as a deficit reduction measure, there is little chance that the $5 million exemption will survive into 2013 and beyond as many estate planners initially thought.

We always suggest that you seek professional assistance when considering strategies like this.  It is MOST IMPORTANT in the area of estate and gift planning!

Estate Tax Reinstated

The 2010 Tax Relief Act reinstated the estate tax for deaths on or after January 1, 2010, and before January 1, 2013. Under this new law, the maximum estate tax rate is 35%, with an exclusion amount of $5 million.

 The executors of decedents who passed away in 2010 may elect the reinstated estate tax option or the no estate tax, carryover basis / limited step-up basis provisions.

 For estates under $5 million in taxable value, executors will probably choose the estate tax option with a $5 million applicable exclusion and the full step-up in basis.  These estates will pay no estate tax and the heirs will inherit the assets at fair market value. 

For very large estates, the election to apply the no estate tax and carryover basis provisions as if the 2010 Tax Relief Act was never enacted will probably render the most savings.  These large estates will not pay estate tax but will have a step-up basis limited to $1.3 million for non-spouse heirs, and an additional $3 million for surviving spouses.

For mid-sized estates (estates between $5 million and $10 million) the analysis will be more complicated.  Executors will need to take into account many factors to determine whether it is better to pay estate tax in 2010 or inherit most assets with carryover basis. 

See your tax professional if you have lost a loved one in 2010.

Effects of the repeal of estate tax for 2010

For taxpayers who die in 2010, when estate tax has been completely repealed, the basis of property acquired from a decedent will be the lesser of:

1)      Adjusted basis of the property in the hands of the decedent immediately prior to death.

2)      Fair market value as of the date of death, or

Each estate will receive $1,300,000 of basis step-up adjustment that can be applied to assets selected by the executor. 

In addition to the $1,300,000 basis step-up, there will be additional increases in asset value in an amount equal to the sum of the following:

1)      The decedents unused capital loss carry forward

2)      The decedents unused net operating loss carry forward

3)      Passive activity losses unused as of date of death

In addition to the above mentioned increases, the estate is entitled to another $3,000,000 of basis step-up for transfers to the surviving spouse.

The Internal Revenue Service is designing Form 8939 “Allocation of Increase in Basis for Property Received from a Decedent” to report the transfers of property taking place in 2010.  Form 8939 is not available yet, but it must be filed with the decedent’s final income tax return for 2010.

Here are 2 illustrations:

John, a single man, dies in with the following estate:

FMV (Fair Market Value)                              $ 8,000,000

Decedent’s Basis                                            2,000,000

Heir’s carryover Basis                                     2,000,000

Plus step-up                                                    1,300,000

Heir’s total basis                                            $ 3,300,000 

If heirs were to sell the assets right away, they will incur a gain of $4,700,000 (difference of 8,000,000 – 3,300,000). 

Joe, a married man, dies in 2010 with the following estate: 

FMV (Fair Market Value)                              $ 8,000,000

Decedent’s Basis                                            2,000,000

Plus spousal step up                                       3,000,000

Plus step-up                                                    1,300,000

Spouse’s total basis                                      $ 6,300,000

If spouse were to sell the assets in 2010 she will incur a gain of $1,700,000 (difference of 8,000,000 – 6,300,000).

These are simplified illustrations but when preparing the actual form 8939, you will need to allocate the step up in basis to the specific inherited assets.  See your tax professional to find out how this may affect you if you’ve lost a loved one in 2010.


In my 6-3-10 blog post I identified potential problems with some estate plans if a spouse should pass away in 2010.  The crux of the problem lies in trust language that is designed to transfer the maximum exempt amount to an irrevocable Decedent’s Trust upon the death of the first spouse.  While this strategy worked well in 2009, it could be disastrous in 2010.  This article illustrates two examples of these which are too voluminous for a blog post. 

Click here for the full article.

2010 Estate Tax Pitfall

In 2001, Congress passed an act that temporarily eliminated the estate tax for the year 2010.  None of us who practice in this arena ever thought that Congress would allow this one year “repeal” to stand. Towards the end of 2009, both houses passed bills reinstate the tax, but nothing ever became law.  While this sounds great, danger lurks within previously drafted estate documents.

I have been very concerned about the impact of this on our middle class clients.  What would happen, I thought, if someone passed away in 2010 with estate planning documents designed around the pre-2010 law?  After all, no one ever expected the 2010 estate tax repeal to actually go into effect.

Earlier this year, my fears were born out.  Jack and Jill were in their 80’s.  They lived on rents from some valuable rental properties they have owned for over 40 years.

Their trust was designed to put the maximum amount of the estate (up to $3.5 million in 2009) about 75% of their estate, into a Decedent’s Trust upon the first death.  This way, when one of them (Jack or Jill) passed away; the real estate would have stepped up to fair market value on the date of death. Assuming Jill died in 2009 or 2011, more depreciation could be deducted and, if the property was sold soon after the death, there would have been no estate tax and no tax on a capital gain.  Translation – the heirs could have sold the property at fair market value and paid little or no tax if Jill passed away in 2009 or 2011.

When Jill died in 2010, following the provisions of their trust, here’s what is supposed to happen:

1)      The maximum amount exempt from estate tax goes into the decedent’s trust.  In 2010, that means everything.

2)      Jack’s estate cannot take advantage of the step up in basis when he passes away after 2010 because all his assets have been distributed out of his estate to the Decedent’s Trust.  Thus, if the heirs sell the property out of the Decedent’s Trust, the taxable gain will be about $3.2 million!

What can we learn from this?

It is June and Congress has not acted on this.  It is probably a good idea if you or someone you know owns highly appreciated property to have an emergency 2010 provision added to the estate planning documents.  Also, if there is a complex estate with different beneficiaries of the various sub-trusts, a “2010 Fix” is probably needed.

For a “primer” on estate planning, read the article “Estate Tax.”  Always contact a professional experienced in this area of practice if you need assistance.


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