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The Estate Tax Is Back From The Dead…

February 13, 2011

Like a scene from a campy vampire movie, the estate tax is back from the dead. True, few Americans will likely notice its resurrection – only about 15,000 estates paid the tax in the latest year for which data is available. But if you have a will or other estate-planning documents tied to the old law, you’ll need to check with your attorney about possible revisions.

You’ll recall that one aspect of the 2001 Bush tax cuts was to reduce the bite of the estate tax gradually, kill it altogether for 2010, and then allow it to come back with a vengeance in 2011. That is, the plan was to reinstate the estate tax at the $1-million exemption level and 55% tax rate that was in effect in 2000. But under the new law, you can leave up to $5 million to your heirs before having to worry about the estate tax. The tax rate for amounts over that level is a flat 35%. Married couples get an even sweeter deal, which ensures that together they can pass up to $10 million to heirs tax-free. If the first spouse doesn’t use up his or her $5 million exemption, the leftover amount can be added to the widow or widower’s $5 million. In the past, couples needed to set up special trusts to makes sure they took full advantage of their exemptions.

Rethinking 2010 rules. Congress gave the estates of people who died in 2010 the choice of using the 2010 no-estate-tax rules or the 2011 $5 million-exemption scheme. Why would anyone choose the latter? Because there was a bit of a land mine inside the one-year hiatus. Sure, eye-popping fortunes could go to heirs estate-tax-free. But the 2010 rules also eliminated the automatic step-up in tax basis – the value on which any gain or loss upon sale would be determined – for inherited assets. With stepped-up basis, inherited assets are valued at the date of death. That means that all appreciation prior to death is tax-free. But for 2010, the law assigned “modified carry-over basis,” meaning that heirs would be stuck with what the original owner paid for the property – and a capital-gains bill that taxes appreciation before death when they sell. The “modified” provision allows executors to increase the basis of assets by as much as $1.3 million (plus an extra $3 million for assets that go to a surviving spouse) thus wiping ou the tax on that much appreciation.

For the vast majority of Americans, a $1.3-million step-up would be more than enough to cover all assets. But even for them, choosing the retroactive re imposition of the estate tax is a better deal. The new rules apply only for 2010, 2011 and 2012. So the fate of the estate tax is still in limbo. Let GAI ( help you with your tax needs. You work hard for your money, let Gunwel work smart to help you keep it! Call us today at 212-979-6830 or stop by for a visit. See you soon!

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