June 7, 2001
Most of these changes are years away. If you think you’ll live past 2010, it would be prudent to start tracking your basis in all of your assets. This has to start with the date you acquired the asset because there is no "fresh-start rule" which would allow basis to be determined at a specified date. Assets you acquire through inheritance until 2009 are at date of death value.
Don’t be stampeded into making immediate changes to your wills and trusts. Stay away from trust mills that promote an urgent need for change.
The only thing we recommend for immediate change is to modify trusts to make the funding of generation skipping trusts optional, and under the control of the executor. Give us a call for assistance in these areas.
Under the recently passed law, the estate tax continues, in a changed form, with an increasing exemption from $1 million to $3.5 million through 2009.
Tax and Exemption by year
|
Year |
Max tax rate |
Exemption Twice as much in second death with a living trust |
Step up in basis |
|
2001 |
55 |
675,000 |
Yes |
|
2002 |
50 |
1,000,000 |
Yes |
|
2003 |
49 |
1,000,000 |
Yes |
|
2004 |
48 |
1,500,000 |
Yes |
|
2005 |
47 |
1,500,000 |
Yes |
|
2006 |
46 |
2,000,000 |
Yes |
|
2007 |
45 |
2,000,000 |
Yes |
|
2008 |
45 |
2,000,000 |
Yes |
|
2009 |
45 |
3,500,000 |
Yes |
|
2010 |
0 |
None |
No |
The generation-skipping transfer tax would be the same as the highest estate tax rate.
The new law totally repeals the Estate Tax for 2010 – for that year only!
Beginning in 2010 the Estate Tax and basis step-up rules are repealed and replaced with new modified carryover basis rules. The beneficiary will receive a basis equal to the decedent’s basis in the property (commonly known as "carryover basis") provided that the fair market value of the property exceeds the basis. When the beneficiary sells the assets, the carryover basis determines the gain on sale and it now becomes an income tax problem. The tax has to be paid if a property is sold after death to split the proceeds among beneficiaries or to buy annuities.
With proper planning, two exceptions will save many estates:
$1.3 million worth of inherited assets can have their basis increased; and an additional $3 million in basis step-up will be permitted on assets passing to a surviving spouse.
Basis increases in excess of fair market value at date of death cannot be allocated to an asset.
Some property is excluded property from the new limited step-up in basis:
Property acquired by gift from a non-spouse less than three years before death,
Property that constitutes a right to receive income in respect of a decedent, and,
Stock in foreign investment and personal holding companies.
It gets really complicated based on what the Government does. All of the changes in the Act expire on 12-31-2010, unless Congress re-enacts them.
Congress will have to make a decision before 2011 on what will happen to the tax in years after 2010. It could be anything from no tax to take it all.
After 2010, real estate or other assets could remain in the family for generations, which will require generations of accurate records to determine basis. Without accurate basis records kept over decades, the IRS will win on the burden of proof issue, thereby keeping basis low and taxing those assets "artificially" high.
California, like many other states, has a pick-up tax in which they receive a portion of tax the IRS would have gotten and the estate receives a credit against their estate tax called the state death tax credit, based on an IRS table. In response to the loss of this revenue, many states, including California, may look at re-enacting their inheritance taxes.
To prevent significant use of gifts to transfer income-laden property from higher to lower rate taxpayers, the new law retains a modified gift tax. Starting in 2010, gifts in excess of a lifetime $1 million exemption would be subject to a gift tax equal to the top individual income tax rate at that time.
Sandra Eve Kardos CPA
800-924-5221 FAX 800-606-2036
PO Box 9333 Van Nuys CA 91409
with offices in Acton, and Ridgecrest, CA
Or E-mail at kardoscpa@mindspring.com