What's New for 2010?
It's an extraordinarily uncertain time-tax wise, that is. This is the first year in decades that American tax law repealed the federal estate tax. As of Jan. 1, 2010, federal estate taxes are repealed for any deaths that occur during this calendar year, regardless of the size of that person's estate (state estate/inheritance taxes will still apply). It used to be that you could own $3.5 million in assets before federal estate taxes were assessed against your estate. For this year only, you can die with any amount of wealth and avoid estate taxes. That sounds like a good thing for everyone, doesn't it? Actually, it could be a double-edged sword. Read on to find out why.
Could the Repeal Hurt My Plan?
It might. In the past, most attorneys created estate plans that gave the surviving spouse an amount tied to what was above the amount exempt from estate taxes. Because of the nature of the tax formula used in these plans, and with an unlimited amount now exempt from estate taxes, the amount a surviving spouse inherits could easily be $0.
It Gets Worse! There is A New Tax for Beneficiaries in 2010
A new tax shows up for those who inherit from estates in 2010. This tax is on the growth of assets, like stocks and real estate, that occurred during the deceased's lifetime. If your beneficiary inherits these types of assets from you in 2010, the cost basis will be at what you originally paid for them (called carryover basis), and any growth will be taxed to the beneficiary.
In prior years, if a beneficiary inherited stocks and real estate, he or she didn't have to pay capital gains tax on the growth that occurred during the deceased's lifetime. The beneficiary received a cost basis that increased to the value as of death (called stepped-up cost basis). If the beneficiary sold that asset right away for its current value, there would be no capital gains because the cost basis would equal the current value.
A small reprieve exists in that the executor can increase the beneficiary's cost basis by up to $1.3 million and another $3 million for assets left to the surviving spouse. Regardless, many commentators believe this tax will affect 10 times more estates than were affected by estate taxes last year.
What Will 2011 Bring?
In 2011, federal estate taxes will reappear with tax rates up to 55 percent, and the exemption level for estate taxes will be $1 million. The carryover cost basis regime will go away, and a beneficiary's cost basis will again be equal to the asset's current value. Congress still may change the laws before 2011 to reinstate estate taxes this year. The exemption level at which it will be reinstated is unknown. Congress may also rid the tax system of the carryover cost basis system for beneficiaries before the end of 2010. This may or may not happen, leaving Americans in a state of tax-limbo.
What Are My Next Steps?
Review your will or revocable living trust with your estate planning attorney as soon as possible to determine if any of your estate plans need to be changed to reflect the temporary repeal of the federal estate tax. The danger of not meeting with your attorney is possibly disinheriting your spouse.
Contact Us
We would be happy to assist you in your charitable planning. Contact our Development Office at 323-761-8704 or development@jewishfoundationla.org to learn more about options that may work for you.