Estate Tax Repeal

The Federal estate tax imposes a 45% tax on transfers at your death.  Each individual has a $3.5 million exemption from Federal estate tax.  Therefore, most people will not pay the Federal estate tax because their assets and life insurance do not amount to more than $3.5 million.

On January 1, 2010, the Federal estate tax was repealed.  This was because Congress failed to act and extend the Federal estate tax.  Currently, if a person dies in 2010, he or she can transfer an unlimited amount at death free of Federal estate tax.  The Federal gift tax remains in effect for 2010.

Another byproduct of repeal will affect every estate – no matter what the value. When your heirs inherit your assets at your death, they receive a step-up in income tax basis.  For example, assume you bought 500 shares of IBM stock years ago for $25 per share.  Assume it is now trading for $125 per share.   If you sell the stock you will be subject to a long term capital gains tax of $7,500 (($125 – $25 x 500 shares) x (15%)).  If your heirs instead inherit the stock at your death, they will receive a $125 stepped-up tax basis rather than your original $25 basis.  Selling the stock after your death produces no capital gains tax.  The law in 2010 replaces the step-up in income tax basis with a modified, carry-over basis.

If Congress does not address the Federal estate tax in 2010, then the law for 2011 becomes much more adverse for taxpayers.  The amount each individual will be able to transfer free of Federal estate tax will drop to $1 million per person.  In addition, the maximum Federal estate tax rate will increase to 60%.

Of course, Congress can at any time pass legislation that would reinstate the Federal estate tax in some form and make it retroactive to January 1, 2010.

Please call us to schedule a time to review your current estate plan and determine what changes need to be made to your plan to minimize taxes and to reduce the possibility of future family conflicts. Unless we otherwise hear that you want to engage us to review your existing plan, we will not begin that process.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact us.

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