The Little-known Capital Gains Aspect of the 2010 Federal Estate Tax Exclusion

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The Little-known Capital Gains Aspect of the 2010 Federal Estate Tax Exclusion

Jan 14, 2010

Posted by Jim Ferguson - NASE EstateTalk


While those who die in 2010 won’t have their estates taxed they might be leaving their heirs a different set of problems to solve:


As you probably know, estates of those who die in 2010 currently won’t be subject to any federal estate tax.  In other words, if you die in 2010, regardless of how large the value of your adjusted gross estate, the federal tax on your estate will be $0.00.  You probably also know that, in the past, those who inherited assets took those assets at a new stepped-up basis equal to the fair market value of each asset at the time of death of the decedent.


What few know is that because there is no federal estate tax in 2010 the IRS has said that those who inherit appreciated assets from 2010 decedents will take those inherited assets at a basis equal to the basis that the decedent had.  In other words, instead of receiving a stepped-up basis, heirs of 2010 decedents who wish to sell their inherited assets, even if they sell them immediately upon taking title, will have to determine what basis the decedent had in each assets and they will be responsible for capital gains taxes on the difference between that basis and the price they receive when they sell.  As a result many heirs will have to spend countless hours looking through thousands of brokerage statements and real estate records to accurately determine the basis they have in their inherited property.


There is small light in this cloud of estate tax confusion:  The IRS will exclude the first $3 million of appreciated assets for spouses of 2010 decedents and $1.3 million of appreciated assets for other heirs.  To many of us these numbers probably seem fairly high but it’s not hard to conceive of a son or daughter who is a sole heir receiving two residences, an appreciated stock portfolio, and a small but valuable business all of which in the aggregate easily exceed $1.3 million.


Most experts expected Congress to change the federal estate tax table before 2009.  While the House did pass a measure, the Senate sat on its hands and failed to act.  Some now expect Congress to pass a measure instituting an estate tax for 2010 and to do so by September of 2010.  It’s also said that the tax will be retroactive to Jan. 1, 2010 although since there is currently no tax it would be novel for Congress to pass a tax and then make it retroactive.  The whole morass would probably wind up in the courts leaving heirs of some 2010 decedents completely uncertain about how to proceed.


(There is one other possible bright spot: “Contracts” that might have been put out for “execution” of some extremely rich relatives will probably eventually get cancelled.  Let’s hope it’s not too late for anyone.)


Stay tuned for further developments.

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