The good news is that the federal estate tax took a vacation in 2010. The bad news is that it spent the whole year lifting weights and taking steroids. The estate tax is coming back in 2011, as big and bad as it has been in a long time. Now is the time to review your estate plan and make changes that could drastically affect how much of your estate goes to your loved ones, and how much goes to the IRS.
Between 2001 and 2009, Congress gradually reduced the maximum rate of the federal estate tax from 55% to 45%. It also gradually increased the “coupon” (the amount of property that you could pass tax-free) from $675,000 per person in 2001 to $3.5 million per person in 2009. That means that with basic estate planning, a married couple could pass up to $7 million free of federal estate tax, if they both died in 2009.
Then, in 2010 only, the estate tax was repealed. But like a horror film character who just won’t die, the estate tax returns again on January 1, 2011—only with a $1 million coupon and a 55% tax rate!
To pay for the 2010 estate tax vacation, Congress replaced the estate tax with an increased capital gain tax. Before 2010, any assets that passed to someone when you died would be valued at fair market value at the date of death. If your surviving spouse or heirs sold any assets that had increased in value during your lifetime, they would not have to pay capital gain tax on any of that growth. This is called a “step-up in basis.”
But in 2010, property that passes at death does not automatically receive this step-up in basis. Instead, each individual has a limited amount of property that can be “stepped-up” in value at the time of death. Property that does not receive this step-up value will be subject to tax on the increase in value from the date you first acquired the property. This means that the property could be exposed to huge capital gain tax liability if it is sold by your heirs!
Now is the time to look into how your estate will be affected by the return of the estate tax. Contact your trusted advisors to find out what changes should be made to your “rule book” —the set of documents that will say what happens to your stuff after you are gone. You may have some prime opportunities to make a huge difference in the amount of your estate that goes to your loved ones. You may even be able to “disinherit” the IRS entirely.
SCOTT MAKUAKANE is a lawyer whose practice has emphasized estate planning and trust law since 1983. He hosts Est8Planning Essentials, a weekly TV talk show which airs on KWHE (Oceanic channel 11) at 8:30 p.m. on Sunday evenings. For more information about Scott and his law firm, Est8Planning Counsel LLLC, check out www.est8planning.com.
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