Happy New Year! Happy New Tax Law?

Well, the year of waiting to find out what would become of the Estate Tax is finally answered, or is it? A better statement would be that the answer will be temporarily postponed for another two years but in the meantime… here’s a tax law to hold you over and to even cause you additional planning questions.


Last year was there was no federal estate tax law in effect. Now, the new tax law (effective 1.1.11) provides two options to the surviving heirs of individuals who died last year. They can either follow the 2010 rules – no federal estate tax, or follow the new 2011 tax rules which provide individuals with a $5 Million dollar exemption.

If you chose the new 2011 rules you can pay estate tax (35%) of a taxable estate over the $5 million exemption and your heirs get a “stepped up basis” of all such inherited property. “Stepped up” means that the cost basis of any property you inherit is determined by the value of that property at the date of death of the previous owner. This is important for capital gains tax savings when the property is later sold.

Alternatively, if chose to follow the 2010 tax rules, you will not pay any estate tax regardless of the size of your estate and the estate will be subject to a modified “carryover basis” rules. When you inherit property under this option, the cost basis of the property stays the same as it was for the previous owner. (Typically the price they paid plus capital improvements). When you sell the inherited property, your capital gains tax will be based on the older and typically lower cost basis.

The carryover however, is modified in that an heir can still step up the first $1.3 million of an inheritance, and a surviving spouse can take another $3 million. Anything in excess of these amounts would be fully carried over at the original cost basis.

So for anyone administering a large estate for a 2010 death, many options are available and careful consideration needs to be made with your tax advisor to determine which tax rules will be more beneficial to your estate. And the lingering question, what will happen if you die in 2013 when we may potentially be facing another period of uncertainty

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem.