The State of the Federal Estate Tax
At this point, almost everyone is already well aware that in 2010 there is no estate tax. This has become very obvious because of the significant press coverage. There is, however, another change in the law that equally affects everyone. This change is not so well known. It's the change to the "step-up" basis rules.
Up through December 31, 2009 one who inherited property would come to own that property at the fair market value of the property as of the date of death. In other words, if the house had a fair market appraised value of $500,000, it would be inherited at $500,000. This was known as "stepped-up basis." Simple enough.
As of January 1, 2010, the step-up basis rules are out. New basis rules are in. New IRS Section 1022 provides that the property is now inherited at carryover basis. In other words, the decedent's original cost basis will "carryover" to the estate. Put simply, if it cost $400,000 to buy the asset, that's the value it will be inherited at. So now the property would be owned at $400,000 and if sold for $500,000 there would be a capital gains tax on $100,000 or a $15,000 tax burden ($100,000 x 15%).
However, IRS 1022 also allows the executor or representative of an estate to assign up to $1.3 Million in basis increase (not to exceed fair market value). This amount can be further increased by any unused built-in losses and loss carryovers. So let's say the property is worth $2.5 Million and the decedent's cost for that property was $200,000. With allowed basis increase, the basis would now be $1.5 Million ($200,000 + $1,300,000).
The new rules also allow basis increase for property left to a surviving spouse. The executor or representative can assign up to an additional $3 Million (not to exceed fair market value). This applies to property left either outright to the spouse, or as qualified terminal interest property (QTIP). It is therefore critical for people to make sure their estate plan is presently drafted so as to be eligible for the $3 Million spousal property increase.
The other obvious fact with the new rules is that a 2010 estate will need to establish the decedent's basis in the property. Going back many years to document what it cost for the decedent to buy the asset could prove to be quite a cumbersome task.
The long and short of it is that 2010 is an interesting year. I hope this gets you thinking. Let's see what Congress does next, if anything.
