In 2010 there is no Estate Tax

It is true that in 2010 estates will pay no estate tax, unless Congress acts to create a law that reaches back to January 1, 2010 (However many estate planning attorneys agree that this would be unconstitutional). This only lasts for one year and then it is scheduled to go back to the pre 2001 Tax Laws in 2011. Any estate of any value will owe zero estate tax to the IRS if the individual dies in 2010. What they don't tell you . . .


No Stepped-up Basis

All estates with assets that carry a low basis; things like stocks, land, business assets will not get a stepped up basis as they did and will in any other year. That means that if an acre of farm land or a stock was purchased for $100 and is now worth $1,100 there is a gain of $1,000 on the asset. If sold (even after death in the estate) the gain is taxed as a capital gain which in MN is 15% Federal and around 7% to the state for most individuals. This is a loss of 22% for the estate if the item is sold or cashed out at any time during the life of the beneficiaries. Luckily there is some lee-way for beneficiaries in the law. . .


Carry-over Basis with Coupons for Beneficiaries

There is a 3 Million dollar gain allowance that can be allocated to a spouse if she recieves the inheritance from her husband upon his death (gifts 3 years prior to death are not allowed to recieve it) or if she recieves it in something called a QTIP trust. Also another 1.3 Million dollar gain allowance can be "elected" by the representative of the estate for other beneficiaries. Both of these additions to basis must be made according to precise rules. Other additions to basis for losses are also available.


Gift Taxes in 2010

Gift Tax law has been decoupled from this estate tax and capital gain tax law change. Essentially we continue to have a 1 Million Lifetime gift exemption any amount over which a 45% tax is due in 2010. Also, we have an annual $13,000 per person gift exemption that does not affect our lifetime gift exemption. A couple can gift up to $26,000 to each child (or actually anyone they choose) each year without affecting their estate tax exemptions in non 2010 years. Joint gifts and gifts over the annual exclusion amount require filing a tax return in most circumstances although usually no tax is owed. It is fun for me to note that in 2011 the gift tax rate drops to 35%.



In conclusions, the estate tax is super-wonky in 2010. I recommend to my clients to attempt not to die in 2010 in order to avoid the basis problems (and just because). All of the problems of the 2010 law go away in 2011 when we will have an entirely new problem of a federal 55% estate tax on all estates over 1 Million and many states continue to have their own estate tax to cause additional planning problems.