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Estate Tax in 2010

The federal estate tax, or “death tax” is in the news these days.

This year (2010) there is no federal estate tax. It was repealed, but only for one year. The federal estate tax will be reinstated in 2011, with a $1 million exemption and a maximum effective rate of 55%. In general, this means for persons with net worth of over $1 million, including life insurance they own, the amount over $1 million is taxable. In 2009 the exemption was $3,500,000, so not many people had estate tax exposure. Next year with a new law, and hopefully a rising economy, this may change.

During 2010, the federal gift tax remains in effect, but at a lower 35% rate. For gift tax, there will be a $1 million lifetime gift tax exemption and an annual gift tax exclusion of $13,000 per donee. Rates on gift tax also rise in 2011 to a maximum marginal rate of 55%.

Concerning capital gains on estate property, before this year (2010) the cost basis for assets held by a decedent would step up (or down) to the fair market value of the asset on the decedent’s date of death. This eliminated a capital gains tax on any pre-death appreciation.

Now, for one year, the “step-up” in cost basis at death for assets acquired from a decedent has been eliminated, and replaced with a modified “carryover basis” system. Assets generally will receive a cost basis equal to the basis of the property in the hands of the decedent under the carryover basis system. An executor can allocate up to $1.3 million of increased basis to the decedent’s assets in general, and an additional $3 million for assets passing to a surviving spouse. Under current law, the prior step up in cost basis will return in 2011.

The annual changes in estate taxes have been confusing to many. Congress may again make changes to the current law. At this time, though, many wills and trusts written in the past that contain plans to minimize estate taxes may not be effective under the current law. Having these reviewed would be a sound idea.

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