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Dying in 2010: Chaos

Inaction by Congress has left the dying/inheritance process in chaos! Uncertainty reigns! No one knows what to do!

Although in 2010 ONLY there is no limit on the amount of money and other assets a person can leave to heirs without having to pay federal estate taxes, there are a number of critical caveats.

CAVEAT #1: The value of the assets in an estate is based on the ORIGINAL cost — not the market value at the time of death.

CAVEAT #2: This mean capital gains taxes are due when the house or other
asset is sold. If a house was purchased 30 years ago for $50,000 and sold
for $400,000, then capital gains taxes would be due on $350,000.

The cost of capital improvements can be added to the original purchase price,
which will reduce the amount on which capital gains taxes are due. For example,
a new kitchen, roof, furnace, air condition, windows can be added. A new deck
or finishing the basement also qualify.

CAVEAT #3: These capital improvement costs have to be documented by the
executor. The problem, of course, is that few people keep such records or
bills from work done sometimes decades ago.

CAVEAT #4: In 2010 only, the estate’s executor has what can be called a
discretionary basket of $1.3 million assignable dollars to cushion the impact
of the capital gains liability. In order to take advantage of this “money”
the executor must allocate an appropriate amount to a clearly specified

In the case of the house, $350,000 can be used to “erase” the gain when the
house is sold. This leaves $950,000 which can be used against the sale of
other assets.

THE 2010 RULES: Therefore, if death occurs in 2010 only, there is no
federal limit to the value of an estate and there is the availability of
discretionary assignable dollars to offset the capital gains liability.

CAVEAT #5: New Jersey still uses the old rules. There is a $675,000
exemption for assets going to linear heirs (children and grandchildren). In
addition, assets are valued on a stepped-up basis, which is market value at the
time of death.

THE PROBLEM: Thus executors are faced with a record tracking nightmare for
federal purposes and with two sets of basic rules.

WHAT’S AHEAD FOR 2011? The current law states that the exemption from
federal estate taxes goes down to $1,000,000 in 2011 and assets are market
valued at death. Taxes, as high as 55 percent, may be due on anything above

CAVEAT #6: Many wills use a formulata approach to set up marital trusts to
minimize taxes when the second spouse dies. Depending on how the will is
worded, the surviving spouse or other heir may not receive what the deceased
really wanted. This is too complicated to explain here.

CAVEAT #7: No one knows when or even if Congress will act. Because it is
an election year, Congress may not act at all. Whenever Congress does act,
the new law may be retroactive to January 1, 2010. This means estates may
remain in limbo indefinitely. In 2010, executors need to be very
conservative in distributing assets early on and closing an estate.