The federal estate tax is a tax on your right to transfer property at your death. For 2009, the top federal estate tax rate is 45 percent and the exemption is $3.5 million. This means that if the net amount of your estate is $5 million, the amount subject to the federal estate tax is generally $1.5 million. The Economic Growth and Tax Relief Reconciliation Act of 2001 includes the repeal of the federal estate tax for people dying after December 31, 2009. It is important to realize that this repeal is temporary. The provisions of the Act will no longer be effective on January 1, 2011, and the tax structure as it existed in 2001 will take effect again. Under this structure, and if Congress fails to enact new legislation, the top federal estate tax rate will be 55% and the exemption will be just $1 million. However, the Obama Administration is proposing to eliminate this “rollback” provision and instead to apply the 2009 tax rate and exemption (45% and $3.5 million) in 2011. The Administration’s proposal also includes eliminating the “no estate tax” rule for 2010 and applying the 2009 tax rate in 2010 as well. (General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, http://www.treas.gov/offices/tax-policy/library/grnbk09.pdf).
To capture lost tax revenue in 2010 when the estate tax has been temporarily repealed, changes have been made to the rules regarding stepped-up basis and capital gain income taxes. A property’s “basis” is generally the purchase price of the property and is used to determine taxable gain when the property is sold. A “stepped-up” basis means that the basis of inherited property is the market value of the property on the date of death instead of what the decedent may have paid for the property. In 2010, the basis rules will change to include a “carry-over” basis for most inherited property rather than the standard “stepped-up” basis. Under a carry-over basis, the basis of inherited property is the same as it was for the deceased owner, which could increase the amount of taxable gain when the inherited property is sold.
This article is intended to be a brief summary of the anticipated changes in the federal estate tax. It is not intended as legal advice or tax advice. If you have specific questions about the federal estate tax, you should contact your accountant or attorney. We invite you to contact any of the attorneys at Blethen, Gage & Krause, PLLP with your questions.