Hershner Hunter, LLP
Congress adjourned for 2009 without passing a change to the current estate tax law, enacted in 2001 (the 2001 Act). Under the 2001 Act, in the year 2010 there will be no estate tax levied, even on estates of more than $3.5 million. However, a negative result is that the assets in decedents’ estates will no longer automatically get a new income tax basis. The gift tax remains in place but the rate of tax on taxable gifts is reduced to 35%.
Under the law as it existed until now, estates got a new income tax basis in their assets, equal to the market value of each asset on the date of the decedent’s death. This new basis was automatic for estates worth less than the exempt amount ($3.5 million in 2009) as well as for those that were worth many times more. Income tax basis is the value from which gain or loss on assets sold is measured.
In place of getting a new basis, the one year repeal of the estate tax ushers in an era in which the recipient’s income tax basis in inherited assets will be derived from the decedent’s basis in those assets, called the carryover basis. The 2001 Act modifies carryover basis to allow estates to assign as much as $1.3 million of additional basis to the decedent’s basis, but not more than the amount necessary to bring the basis in any asset up to its then fair market value.
For most bequests to spouses of the deceased, the additional basis that can be added to the estate is increased to a maximum of $3 million.
Estates will be required to file a return in order to document the decedent’s basis and claim the additional basis. This means that nearly all estates will have to file returns, even those with values well below the $3.5 million that was exempt from federal filing requirements in 2009. The filing threshold for the Oregon inheritance tax has been $1 million for several years, so the additional burden of filing for a federal carryover basis election may be minor for Oregon estates worth at least $1 million.
With the change in the basis rules, it will be helpful if individuals maintain good basis records so that the personal representative or trustee of the decedent’s estate can determine the starting point for making the federal carryover basis election.
Congress can always enact new changes to the estate tax when it returns to session, including reinstating the estate tax for 2010. If Congress continues to do nothing about the estate tax, then in 2011, as a result of the 2001 Act, the largest amount that can pass tax free will be $1 million and the highest estate tax rate for the largest estates will jump from 45% to 55%. If Congress does enact a change in 2010, it is difficult to predict what form it will take or whether it will be enacted retroactively.
Most estate plans are flexible enough that these changes in the tax exempt amounts and rates will not change the ultimate distribution of assets on the death of the decedent. However, clients should review their plans, particularly for formula clauses that leave some of the estate to surviving spouses and some to persons other than the spouse, where the calculation of the split is tied to the amount exempt from federal estate tax.
If you have questions, please contact any member of The Estate and Business Planning Practice Group:
David N. Andrews
William D. Brewer
Arthur J. Clark
This article provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.
