Earlier this year, Congress again failed to repeal the federal estate tax.
As many practitioners anticipated (including this blogger), Congress went back to the drawing board to produce a bill which modifies, rather than repeals, the existing tax.
The proposed bill would:
- Reunify the estate, gift and generation-skipping transfer (GST) taxes.
- Increase the estate and gift tax exemption to $5 million per person.
- Reduce the estate tax rate for estates up to $25 million to the capital gains tax rate, currently capped at 20%.
- Reduce the estate tax rate for estates of $25 million or more to two times the capital gains rate.
- Allow married couples to carry over any unused exemption to the surviving spouse.
Will it pass? I predict that some version, perhaps with limited changes, will indeed pass Congress. Most Americans seem to favor estate tax reform but not estate tax repeal. While there are those in Congress hoping to push their own agendas (Frist and Kyl, for example) by introducing and re-introducing the same stale repeal bill destined to fail, this compromise bill seems to have some legs.
I must be missing something. Maybe it’s my demented thought process. When this law was enacted, I was amazed our tax system had degraded to the point that we may need tax planning on which year is best for “pulling the plug”. Does this seem to be over the top? I’ve seen little discussion on this; probably because this was supposed to change before the end of 2010. However, it hasn’t so far. Suppose it doesn’t change. If I had a taxable estate, was in poor health, and cared how much more I could leave to my loved ones by passing in 2010 instead of waiting, the timing of my death for tax purposes just might become a critical part of my estate plan. Conversely, suppose the heirs of a large estate foresee the millions that would evaporate if death occurred after 2010. Could this foster some interesting “whodunits”? Is that sick? Perhaps; but isn’t it just as sick to enact tax laws that can make those scenarios possible? Congress really needs to fix this!
What this article , and subsequent comments seems to overlook is that the estate tax was not entirely eliminated for 2010. Instead of a simple tax on the total value of the estate, most of which has not been previously taxed as it represents capital gains in most estates, it reinstates capital gains taxes on all those gains, which must be calculated form years, or decades ago along with additonal investments, etc . These taxes will be due when the asset is sold, perhaps not for genterations in the case of family homesteads or businesses. At that time it will be the duty of the current owner to document the cost basis of these assets; As someone who would have trouble finding the paperwork to document gains on relatively short term investments, without the assistance of my investment adviser’s computer, I cannot imagine digging through boxes of paperwork from long dead relatives and h0ping the documents still even exist. (actually I can , my mother passed away in February. 57 years worth of checks, stubs, copies, invoices ,etc. to sort . And more yet to come. )
Kris, you’re right about the lack of stepped-up basis being a headache. There are actually a couple pieces on the site about it. Here’s a quick and dirty explanation of basis: http://www.taxgirl.com/what-the-heck-is-basis-anyway/
I’m not sure about your mom’s situation but remember that there’s an exemption available for estate-related capital gains in 2010.