The State of the Federal Estate Tax

Posted on February 2, 2010 by John O'Brien

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.

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The Art of Estate Planning

Posted on April 16, 2009 by John O'Brien

Clients frequently have amassed a wonderful and valuable art and antique collection during their lifetime.  During the planning process, these assets must be carefully looked at and not simply considered regular personal property to be devised by Will or otherwise at the time the client passes on.  Art and antiques are appreciating assets, and as with any appreciating asset, the goal of a well created estate plan is to remove the appreciating asset from the estate.  The earlier the Hassam painting, the Queen Anne high chest of drawers and the Chippendale chest of drawers are removed from the estate the better.  It helps with the potential estate tax and allows the beneficiaries to enjoy the future appreciation without concern to tax implications.  And while one must always look at gift tax implications, as the Low Art Prices Mean High Time to Make Gifts article from the Wall Street Journal points out, there is no better time than now to pass on your treasure because of present market conditions.

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Don't Fall Off The Cliff!!

Posted on April 15, 2009 by John O'Brien

Connecticut does not impose an estate tax on estates valued under $2,000,000.  Thus, there is a zero tax due on estates valued at $2,000,000 or less.  However, one dollar over the exemption triggers a significant tax.  This is the infamous Connecticut Estate Tax Cliff.  An estate worth $2,000,001 will trigger a tax of $101,700.  Yes, that's $0 to $101,700 in the flash of one dollar.

Certain members of The Connecticut Legislature have attempted to eliminate this problem and have, to date, unfortunately failed.  And frankly, in the present economic climate, it is unlikely that such a measure could be passed. So counting on the Legislature does not make for good present planning.  Don't count on the Legislature, rather look to employ some of the following strategies.

(1)  Make gifts during your lifetime to reduce your estate at or below the $2,000,000;

(2)  Incorporating charitable bequests in planning during life in effect having anything over $2,000,000 paid to a charity or charities; and

(3)  Post-Death Planning can include reducing the taxable estate by legitimately increasing deductions.

These are just a few of the ways the problem is addressed.  Although, it must be addressed in your estate plan.

Those of us thinking that we already have a good plan in place really should have a check-up this year.  Until this year, the Federal exemption and the Connecticut exemption were the same -- they were coupled.  That's not the case now with the Federal exemption at $3,500,000 and the Connecticut exemption presently, and for the foreseeable future, at $2,000,000.  Many plans, with marital planning, are premised on this coupling and should be changed to properly and effectively account for the new difference.

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