Trusts and Estates: Estate Tax Repeal in 2010

Currently, the federal estate tax is scheduled to be repealed in 2010 for that year only. However, with the repeal of the estate tax, heirs will lose much of the benefit of the "stepped-up" basis in the decedent's property that they now enjoy. In 2010, heirs must assume, or carry-over, the decedent's basis in inherited property instead of "stepping up" to fair market value on the date of the decedent's death.

The law will provide for a basis increase of up to $1.3 million in inherited property ($60,000 for nonresident, non-U.S. citizens), with an additional $3 million increase for surviving spouses. However, many people may still end up paying more taxes in 2010. For example, the estate of an unmarried person who dies in 2009 with $3.5 million in assets and a basis in those assets of $200,000 will not be subject to federal estate tax (because of the $3.5 million estate tax exemption), and the heirs may sell the property with no capital gains tax on the proceeds using the stepped-up basis. If death occurs in 2010, similarly, the estate would not be subject to federal estate tax (because of repeal). However, with a basis of only $1.5 million ($200,000 carry-over basis plus the allowed $1.3 million basis increase), capital gains taxes would be due on the remaining $2 million profit if the heirs wished or needed to sell the property.

For residents of certain states, the impact could be even more dramatic, as they could also be subject to both the state estate tax and state income tax, if the state uses the federal basis.

Given the complexity of these situations, we recommend that you contact an attorney in our wealth management practice to discuss your particular situation.