Federal Estate Tax Repealed for 2010
You may have read about the repeal of the federal estate tax on January 1, 2010.
First, what is the "Federal Estate Tax"? Historically, under federal law, significant transfers of wealth at death, or gifts during life, were taxable through a unified system of estate and gift taxes.
A law was passed in 2001 that gradually decreased the federal estate tax and increased the estate tax exemption through 2009. That law stipulated that if no future laws were passed the federal estate tax would go away in 2010, with an unlimited amount able to be transferred estate tax free.
If no further legislation is passed between now and the end of 2010, the estate tax will be in effect in the year 2011 and the applicable exclusion amount will be $1 million with the estate tax rate of 55%.
This means that, in the year 2011 (absent new legislation), only $1 million per person may be transferred estate-tax free at death. In all likelihood, new legislation will be enacted this year.
2010 carryover basis rule
In conjunction with the one-year estate tax repeal, for this year only, the "stepped-up" basis rule is replaced with the "carryover" basis rule. This means that heirs will now have to use the original price paid for an asset instead of the value of the asset upon the owner's death when computing their tax liability. This new carryover basis rule could be very expensive and difficult for heirs. For example, if you inherit shares of General Electric that your parents accumulated over many years, you might be stuck hunting for all of their transaction slips and adjusting for stock splits along the way. And when you sell any of the shares, you may owe capital-gains tax on the appreciation.
Carryover basis exemptions
Each estate can exempt $1.3 million of gains from the 2010 carryover basis rule. Another $3 million exemption applies to assets inherited from a spouse. The $1.3 million exemption can be used by the spouse instead of other beneficiaries for a total appreciation of $4.3 million exemption for spouses.
Points to ponder
If you have an estate plan that was written before the end of 2009, you should make sure your plan is up-to-date based on current law, and not just for estate tax reasons.
In other words, January 1, 2010 may have been one of those "major life events" that call for a careful review of your plans by a competent professional. For example, a will provision which leaves "the amount exempt from federal estate tax" to children could result in leaving less to your spouse or more to children than you intended.
If you are working on your estate plan and want to include a gift to Cal in your plans we would be happy to provide you language to include in your will of living trust. By leaving a gift to Cal in your will or living trust you are playing a vital role in ensuring that we can fulfill Cal's promise of sustaining academic excellence, educating eager minds, and contributing to the betterment of society.
