So far, Congress has been unable to decide on the rules for 2010 estate tax. At the moment, the 2010 estate landscape
looks like this:
There’s no estate tax regardless of the size of the estate.
$1.3 million of assets (plus $3 million for assets transferred to a surviving spouse) can pass to heirs with a “stepped-up” basis – the value as of the date of death. The executor will need to determine which assets receive the stepped-up basis. Any unrealized gains above the $1.3 million (or $4.3 million with spouse) amount will be subject to capital gains tax. The cost basis of those assets is the carryover basis – the value as of the date of purchase. So, the repeal of the estate tax eliminated one tax but raises another concern – capital gains tax. Why? Because if capital gains tax is due, it will be based on the carryover basis of the assets. This structure is advantageous to those with very large estates because the capital gains they may pay will likely be less than an estate tax. Those whose estates are smaller may pay capital gains on inherited assets that may have passed tax-free under earlier estate tax rules. It’s possible (and widely assumed) that Congress will reinstate the 2009 rules for 2010 or come up with some other plan but it may not be settled until late in 2010. If the estate tax is reinstated, the exemption amount, the top estate tax rate and whether assets will use step-up or carryover basis will be important elements to note. The estate tax is scheduled to return in 2011 with a $1 million exemption amount and a top rate of 55%. In view of all this uncertainty, it’s more important than ever to consult with your advisors. Make sure your estate plan accounts for a year with no estate tax. Determine the cost basis of any appreciated asset as of the purchase date. It may be wise for some to make transfers now (before death), and while interest rates and asset values remain low.
It’s easy to misjudge your estate’s size. It includes home equity, retirement accounts, foreign assets, coming inheritances and proceeds from life insurance. Many of your assets should pass outside your will, through IRAs, qualified plans and insurance proceeds, so a precise designation of beneficiaries may be your most crucial planning issue especially in the event of divorce and other family changes. As baby boomers transfer assets to children, the latter must decide how to receive them. One method is an “inheritor’s trust” to receive even small inheritances. But trust income is taxed as high as 35% for income above $11,201. Get help from your advisor. If you inherit an IRA, ask the estate executor for any Form 8606s that were attached. They track nondeductible contributions, and the IRS exacts a penalty for failure to file them. Otherwise you may pay too much tax. Assuming the estate tax is reinstated for 2010 (and we know it returns in 2011), consider these other ways to save more of the money from an inheritance:
If the inheritance will put your own estate over the exemption amount, you can renounce your share through a disclaimer and pass it on directly to later generations. Your estate will pay no tax.
You can value an estate’s assets either as of the date of death or six months later. (The estate tax return is due nine months after the death.) Check the value on both dates and try to use what date produces the least estate tax.
If property you inherited is later sold at a loss, you can deduct the loss on your return.
If the estate’s executor is a beneficiary, he/she should collect executor’s fees and deduct them from the estate.
The executor’s income tax rate may be far lower than the tax rate on the estate.
An estate must file an income tax return for the decedent on April 15 following the year of death even if no federal estate tax is due. Executors are liable for any unpaid estate tax and income tax, and often wait to distribute until the IRS agrees on its tax status. The estate may use a fiscal year rather than a calendar year to delay payment of income tax longer. A joint return will cover part of a year for the deceased but a whole year for a surviving spouse, who can make tax-saving moves in the meantime.
Realize losses or gains to offset those of the deceased.
Deduct the decedent’s medical expenses, if an appropriate election is made on the return.
One of an executor’s essential roles is to determine the market value of all the estate’s assets, so that the heirs can use the proper basis when they later sell the assets.