Review all estate planning documents to determine if any changes are needed as a result of the federal estate tax and the federal generation-skipping transfer (GST) tax repealed for estates of decedents dying in 2010, noting both taxes are scheduled to return in 2011. Married couples might want to divide assets to maximize federal basis increase.
In 2010, there is no increase in the cost basis of assets to market value at death in calculating capital gains tax on property inherited. The automatic "step-up" in basis for assets owned by a person who dies in 2010 has been eliminated and replaced with a "carryover basis" for capital gains tax purposes. With carryover basis, beneficiaries inherit property with the same property cost basis as the decedent. The executor of an estate can allocate up to $1,300,000 of basis increase (plus, unused built-in losses and loss carryovers) to any property in an estate and another $3,000,000 of basis increase to property passing to a surviving spouse outright or in qualifying trusts. In 2010 estates will escape federal estate tax, but potential capital gains liability for heirs could exceed what the estate tax would have been.
The federal gift tax remains with a reduced 35 percent tax rate, down from 45 percent. The repeal of the GST tax for 2010 creates an opportunity to make gifts in trust to children or grandchildren that may escape transfer taxes for future generations. Though, keep in mind the possibility of retroactive reinstatement of the GST tax.
Unless Congress provides otherwise, on January 1, 2011, the federal estate, GST and gift tax laws return to what they were in 2001 where there will be a federal estate and gift tax with an exemption of $1,000,000 and a top tax rate of 55 percent (plus a 5 percent surtax on estates from $10 million to $17 million), and a GST tax with an exemption of approximately $1,340,000 and a tax rate of 55 percent.
Engage a bankruptcy attorney who understands different legal options for estate planning.
