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Estate Tax Planning 2010

Throw Momma from the Train?

Mary-Jo Kranacher, MBA, CPA, CFE

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) temporarily suspended the federal estate tax and generation-skipping transfer (GST) taxes for one year—2010. Since the passage of this law, jokes about “pulling the plug” on wealthy relatives to take advantage of this one-time opportunity to inherit assets—tax-free— have circulated within financial circles. But asking a loved one to time their passing to maximize the tax benefits would likely not go over well. So before potential heirs prematurely count their money, let's examine whether reports of the demise of the so-called death tax have been exaggerated.

The federal estate tax will return next year with a vengeance, restoring the pre-EGTRRA rates of up to 55% on the value of an estate over $1 million.

Because changes to our tax laws are supposed to be revenue-neutral, what Uncle Sam gives with one hand, he takes away with the other. The same law that eliminated the estate tax also changed the step-up in basis provision. Prior to these changes, the basis of a decedent's assets was increased to fair market value at the time of the owner's death. For 2010, the step-up provision is limited to $1.3 million for the entire estate, and an additional $3 million is allowed for assets transferred to a surviving spouse. Consequently, when the assets of large estates are sold this year, it is more likely that they will be subject to capital gains tax. So much for a free ride!

Place Your Bets

There's a 50/50 chance that lawmakers will take action on this issue. Late last year, the House of Representatives passed a bill that would have extended the estate tax into 2010, but the Senate rejected it. Some taxpayers are betting that nothing will be done this year, as in prior years, to change the EGTRRA provisions that repealed the death tax for 2010. And with everything that Congress has on its plate— the economy, unemployment, healthcare— they may be right.

However, even if Congress does nothing to address this year's dilemma, that doesn't mean the last of the death tax. The federal estate tax will return next year with a vengeance, restoring the pre-EGTRRA rates of up to 55% on the value of an estate over $1 million. If that isn't enough, even though the estate tax will rise from the ashes in 2011, the step-up in basis provision will not—a double whammy!

Others are gambling that Congress will enact a retroactive (i.e., effective as of January 1, 2010) extension of the 2009 rates and exclusion amounts—45% and $3.5 million, respectively—until they can agree on an acceptable compromise as part of broader tax reform.

State Estate Taxes

Just when you thought we'd beaten the estate tax to death, there are still state estate taxes to consider. Traditionally, estate tax planning centered on reducing a taxpayer's federal tax bite. Prior to 2005, the “pick up” tax allowed the total estate tax to be shared between the federal and state taxing authorities. But in 2005, EGTRRA's phase-out of the pick-up tax altered this strategy. As a result, some states that had previously collected a pick-up tax instituted a separate estate tax.

As of January 1, 2010, the following jurisdictions collect such a tax: Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Tennessee, Vermont, and Washington.

Death and Taxes

Regardless of whether you believe that estate tax rates are too high or the exclusion amounts too low, we all know nothing is certain except death and taxes. Most taxpayers also feel that the time has come to eliminate the complexity and uncertainty in our tax system that has made prudent estate planning a goal to die for.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief. mkranacher@nysscpa.org.

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