In 2001 when Congress repealed the estate tax for the far off year of 2010, with the estate tax returning in full force in 2011, everyone assumed that Congress would act to revise the 2001 law before January 1, 2010. However, to everyone’s surprise, Congress did not act. The new year has come and gone and so has the tax—at least for now. But is this a good result? Is 2010 a “good year to die”? 


First, although there is no estate tax in 2010, in 2011 there is a $1,000,000 exemption and 55% tax on the remainder of the estate. 


Second, the estate tax could change before the end of the year. There is precedent for Congress retroactively restoring taxes that have been upheld by the courts. This means that while there is still time for Congress to do something about the estate tax repeal, what they may agree to is unknown.  


Third, in 2009 and 2011 the basis of an asset inherited or received will receive a step-up in basis to the value as of the date of the owner’s death (or the alternate valuation date six months later).  In 2010 there is no step-up in basis, but instead there is a carry-over of the decedent’s basis to beneficiaries. However, an estate representative can elect assets for a basis increase of up to $1,300,000 and an additional $3,000,000 of basis increase if there is a surviving spouse of the deceased. Anything exceeding those amounts is subject to carryover basis—the basis for the heir is the same as the basis for the deceased. On very large estates that may have held real estate, stock and other assets for decades, the carryover basis may be a fraction of the current fair market value of the asset which will result in a large taxable gain to the heir when the asset is sold.   


Fourth, most wills and trusts are currently drafted on the assumption that there is a federal estate tax. Language in trusts often refers to the exempt portion of the estate, but under the current repeal this language does not make sense since all of the estate is exempt. 


Fifth, the tax rate for lifetime gifts has been lowered from 45% to 35%. But again, it is unclear if Congress will change this tax rate if they patch the estate tax. That makes this year a year of uncertainty for lifetime gifts as well, although the $1,000,000 lifetime gift exemption is still in effect.


Be careful not to assume that your assets (e.g. cash, securities, business interests, real estate, retirement accounts and the face value of life insurance policies) fall below the exemption. Now is the time to review your family’s assets, your beneficiary designations and your estate planning no matter the current value of your estate.  Check back here periodically for updates on this issue as Congress is expected to act sooner or later.