Daily Business Review: 2010, the year of zero estate tax

If there was ever a year to die, this is it. As of January 1st, 2010, the United States will levy no estate taxes – a situation we haven’t experienced in nearly 100 years – for a full year. Will it last, or will a revenue-starved federal government revoke the expiration? What other implications does this have for taxpayers?

In today’s Daily Business Review, Wayne Tompkins published a superb overview of the topic, detailing the political machinations leading to this event, the unintended consequences of the expiration, and what’s next for estate planners, lawyers, and heirs.  For excerpts, see below; to read the article in its entirety online, visit the Daily Business Review‘s website.
2010, the year of zero estate tax
Wayne Tompkins, Daily Business Review
January 12, 2010

This was supposed to be the perfect year to die – at least from an estate-planning standpoint: For the first time since 1915, there is no federal estate tax.

If that sounds too good to be true, it’s because it probably is. Unintended consequences could accidentally disinherit heirs, trigger capital gains issues, spawn countless lawsuits and turn one’s 2010 death into a nightmare for executors and estate planners.


“We are now in a tremendous mess,” David Kron, partner and estate planning attorney with Roden McClosky in Fort Lauderdale. “This is a decade in coming, but no one ever anticipated this happening.”

A 9-year-old federal tax law allowed the estate tax to fall to zero, but only for this year…

…The downside is that the absence of an estate tax affects what’s called a stepped-up basis.

“You bought something in 1930 for $10, and now it’s worth $10 million,” said Steven Hagen, an estate-planning attorney with Harper Meyer in Miami. “Your estate pays a tax on the $10 million, but then your heirs receive that asset with a cost of $10 million. If they sell it the next day, they have no income tax to pay.” This year, when there is no estate tax, you don’t get that stepped-up basis.

“So now there is no estate tax, but the heirs would take that asset with a $10, not $10 million, basis.”

Step-Up Exemption

There is still a step-up exemption for the first $1.3 million — and a $3 million exemption for assets that are being inherited from a deceased spouse to a living spouse. After that, there is no step-up, meaning a $10 million sale now is subject to capital gains taxes.

“The estate tax rates are higher than the income tax rates, so in theory that’s OK — you’d rather pay income tax rates,” Hagen said. “But it’s a complication.”

Another complication: If someone dies with $5 million of assets, a fiduciary, or executor, allocates that $1.3 million step-up exemption as they see fit. If one heir feels others are benefiting at their expense, the executor could be sued.

And, of course, a lot of people don’t keep records back to when they acquired an asset.

“It’s a lot easier to know the value of something on the day the person died,” Hagen said.

Planning Can Go Awry

Jonna Brown, Lydian Bank & Trust’s wealth management and trust director, gives another example of where the absence of an estate tax could make things go awry:

Generally, an estate plan for a married couple provides that when the first spouse dies, the amount of the estate tax exemption [$3.5 million in 2009] is set aside and used to create a credit shelter trust for the benefit of the surviving spouse, or distributed outright to children, Brown said.

The remaining assets are generally distributed to the surviving spouse or held in a marital trust for his or her benefit. This allows the payment of estate taxes to be deferred until both spouses are deceased.

Given that we have no estate tax right now, she said, if one of the spouses were to die, depending on how the estate-tax exemption amount and marital trust amount were drafted, “the documents are not going to work as they initially were intended because the estate tax exemption amount could be the entire estate.”

If a married couple has significant assets, the estate-tax exemption amount might have been distributed directly to the children upon the death of the first spouse. This could result in the surviving spouse receiving no assets under the estate-planning documents.

New Law May be Coming

Congress may very well “fix” the problem sometime this year with a new law, effective either later this year or retroactive to Jan. 1…

To read more, visit http://www.dailybusinessreview.com/news.html?news_id=59772.

About Wayne Tompkins:
Wayne has written for the Daily Business Review since 2007. Prior to that, he briefly covered Miami-Dade County government, real estate and international business for Miami Today. Before that, he was a business writer for about eight years at the Louisville (Ky.) Courier-Journal, where he covered several beats including UPS, energy and telecommunications. He also produced special projects and wrote for the paper’s Monday Small Business/Work Life section.