There is Never a Good Time to Die

                        A client recently came into my office.  He had heard that because there was no federal estate tax on assets transferred to beneficiaries at death in 2010, now is a really good time to die.  He thought, since the end of the year was coming soon, drastic action was necessary.  I could not disagree with him more.  In fact, moving on to the great beyond maybe a fool’s errand.  I responded to him that clearly there is never a good time to die, and he could quote me on that.

                        2010 Federal Estate Tax Laws Changes.  The client’s basic premise was correct: for 2010, the federal estate tax was repealed.  An estate of a taxpayer who dies in 2010 pays no estate tax to the federal government. The federal estate tax law was modified beginning in 2002.  From 2002 to 2009, the federal “exemption” amount (the amount that a person can transfer free of federal estate tax at death) increased from $1 million beginning in 2002 to $3.5 million in 2009.  Moreover, the federal estate tax rates were reduced over that period.  The law provided for a repeal of the estate tax in 2010.  The purpose of the 2001 law was to reduce the number of estates subject to tax and reduce the estate tax paid by those estates.

                        In 2011, the exemption will once again be $1 million ($2 million for married couples), and an estate tax rate of 55 percent will apply to any amount in excess of that amount. 

                        Future of the Federal Estate Taxes.  The big uncertainty centers on what action Congress may take at the last minute in connection with the federal estate tax.  A number of options exist for Congress, and the actual legislative action may turn on who is in Congress after the November 2010 elections.  Congress could:

                        1.         Do nothing and let the current 2011 change take place ($1 million exemption and 55 percent tax rate),

                        2.         Reinstate the 2009 provisions of the law prospectively, or

                        3.         Reform the entire area of the estate tax law.

Depending on who is making the rules for any new estate tax, it may be a good tax strategy to hang around a while longer just to save taxes.  Pundits have also speculated on a retroactive change to the estate tax law, but that is even more of an excuse to keep on living.

                        State Tax Issues.  A descendant’s individual state of residence may have a separate estate tax which would be in addition to any federal estate tax.  California has no estate tax.  Thus, while California may not be a great place to live from a tax perspective, California is indeed a good place to die.

                        Stepped-Up Basis.  Another significant issue related to the federal estate tax law is the way the tax basis of inherited assets is calculated.  The big deal is what is referred to as a “stepped-up” tax basis.  In 2009, and most tax years before 2009, if a beneficiary inherited assets, such as stock or real estate, the beneficiary’s tax basis in the asset equaled the fair market value of such asset at the decedent’s date of death.  Thus, if the beneficiary later sold the asset, taxable gain would be calculated on the difference between the sales price and the stepped up tax basis.  In 2010, the step up in basis was eliminated, since there was no estate tax.

                        Rather, a beneficiary would receive a carryover basis for tax purposes, meaning the beneficiary would inherit the asset and the decedent’s tax basis with no step-up.  Exceptions exist for certain inherited assets where the basis of the asset may be increased, especially in the case of assets passing to a spouse of the descendant.  Depending on the amount of appreciation built into an asset, the step up could be a substantial amount.  With no step up in 2010, it may not be a good time to die