Dear Friends:
As many of you may be aware, the federal estate tax is inapplicable to the estate of anyone who dies in 2010. Although this seems like good news for many families, there are two significant problems created by the same law. The first problem is that there is no step up in basis for property acquired from a decedent in 2010. The second problem is that the “exemption equivalent” for the estate of anyone who dies in 2011 or later is only $1,000.000. We will address each of these problems separately.
A. No step up in basis.
1. The Problem. The best way to understand the problem is to use an example. Mom died in 2010 owning her home. Her Will passes her home to you, her only child. Mom purchased the home many years ago for $50,000.00. The legal term that describes what she paid for the property is “basis”. The home was worth $300,000.00 when mom died. If you sell the home for $300,000.00 you will have a capital gain of $250,000.00 which must be reported on your income tax return ($300,000.00-$50,000.00). If mom had died in any year other than 2010, her “basis” in the home would have been stepped up to its date of death value, $300,000.00. For that reason, there would have been no gain because you would have sold an asset valued at $300,000.00 for that exact price, $300,000.00.
2. What to do about it. A not widely known provision of the law allows someone who acquires property from a decedent in 2010 to file a special tax return which elects to take a step up in basis for property acquired from a decedent. By filing this return you can elect to raise mom’s basis in the home to $300,000.00. This will not happen automatically. The return is called a Large Transfer at Death Return. The maximum amount of basis that can be stepped up is $1,300,000.00; however, additional amounts can be stepped up for property passing to a spouse. So, if you acquired property from a decedent who died in 2010 we recommend that you contact your attorney and/or tax advisor immediately so as not to lose this potentially important benefit.
B. Exemption equivalent of $1,000,000.00 in 2011 and subsequent years.
1. The problem. Beginning in 2011 the federal estate tax returns, and it does so with an “exemption equivalent” of only $1,000,000.00 for property passing to anyone other than a spouse who is a United States citizen. By comparison, the “exemption equivalent” in 2009 had been $3,500,000. Although $1,000,000.00 may sound like a lot of money, the gross taxable estate for federal estate tax purposes includes life insurance proceeds, retirement accounts, your home, and anything else you may own that has value. If you inventory your assets, you may be surprised to find that they equal or exceed $1,000,000.00 in value.
2. What to do about it if you have a spouse. If you have a spouse, a credit shelter trust as part of your estate plan will allow you to double the amount that passes estate tax free to your children or other non-spouse beneficiaries. We recommend that you contact your attorney to find out more about the use of a credit shelter trust. If you look at the attachment to this letter, you will find additional information about the credit shelter trust.
3. What to do about it if you don’t have a spouse. Gifts to beneficiaries of up to $13,000.00 per year per recipient have no gift or estate tax consequences. More sophisticated gifting techniques involving trusts may be appropriate in particular circumstances. If your assets exceed $1,000,000.00, we recommend that you speak with your attorney and/or financial advisor about appropriate strategies.