Changes in Estate Law in 2010
In 2001 Congress passed a sweeping tax reform bill that includes changes to estate taxation. Estate tax is repealed in 2010, but due to budget constraints Congress only ended the tax for one year. Unless further legislation is passed, estate tax will return in 2011. This makes estate planning all the more difficult - and underlines the need to review your plans routinely to stay abreast of changes in taxation.
Under current law, estates whose gross value is under $2 million in 2008 or $3.5 million in 2009 do not have to file estate tax forms and do not owe estate tax. In 2010 all estates avoid estate tax. For deaths after 2010, the picture is sure to change, and it’s anyones’ guess where estate tax will end up. Unless Congress acts, the exemption falls to $1 million in 2011.
Year - Exemption - Federal Tax Rate Ceiling
2008 - $2 Million - 45%
2009 - $3.5 Million - 45%
2010 - Estate Tax Repealed
2011 - $1 Million - 50%
In addition to repealing estate tax, Congress eliminated the step-up in cost basis that estates currently enjoy. Simply put: if your aunt long ago purchased XYZ stock for $1 per share, and if on the date of death the fair market value was $100, when you inherit the stock your cost basis is $100 per share. So when you sell it, you only pay income tax for any increase in value over $100 per share. Starting in 2010, your cost basis would be $1 per share, and after inheriting the asset and selling it you will be required to pay income tax on the gain from $1 per share. Congress replaced the step-up in cost basis with a modified plan that allows the estate executor to allocate up to $1.3 million (up to $3 million for a surviving spouse) in stepped up costs to most assets.