2010 Estate Tax Issues

This year is a year of "unknowns" when it comes to Estate Taxes. What is the total Gift and Estate Tax Exemption? Will there be a retroactive tax? Will assets receive a step-up in basis? What is the applicable Gift Tax rate? Under the current law, what will the Gift and Estate Tax Exemption be in the future?

Answers to these questions lie primarily with Congress, and I expect that we will have them by the end of the year. However, there is an additional twist that could cause the confusion surrounding these questions to be drawn out into next year or even later. I'm referring to the Constitutional prohibition against ex post facto laws (laws enacted after the fact to apply retroactively). While the Supreme Court has previously upheld laws imposing retroactive taxes, there are many who question whether the current Court will do so in this case.

This uncertainty leaves us in a state of flux. Most tax professionals believe that Congress will enact legislation that will be substantially similar to the estate and gift tax laws which were applicable in 2009. In other words, all assets will be eligible for stepped up basises and the individual estate tax exemption will be in the $3.5M range. Because the vast majority of estates are valued at under $7M (for couples) or $3.5M (for individuals), legislation which retroactively brings back 2009's laws would benefit most estates.

"But wait, I thought there are NO ESTATE TAXES in 2010?" How is a retroactive tax beneficial? Good question. In itself, it isn't. What is beneficial is the Estate Tax's step-sister: the unlimited step up in basis which reduces or eliminates capital gains taxes. Currently, non-spousal beneficiaries of an estate are only entitled to step up $1.3M in estate assets.

What this means is that, in an estate valued at $3.5M, containing primarily highly appreciated assets, the heirs could face significant and unexpected tax liability in the form of capital gains taxes on up to $2.2M!

In light of the current uncertainty, my best advice is to discuss your situation with your attorney, CPA, and financial advisor, and do your best to stay healthy and alive through 2010.