estate planning quad cities moline rock island illinois davenport bettendorf iowa naperville wheaton chicagoEstate Planning In Uncertain Times
Estate Planning in Uncertain Times

Written by John A. Slover, Jr.
Published in the June 2010 Edition of the Quad City Times Business Journal
In 2009, Congress did a disservice to the Nation by failing to deal with the federal estate tax in a way which gives taxpayers and their advisors a clear path to knowing the "rules of the game.”

In 2001 when President Bush signed the Economic Growth and Tax Relief Act into law, it contained, among other things, provisions to gradually increase the exemption amount to avoid federal estate taxes ending with the repeal of the federal estate tax in 2010. Then in 2011, the federal estate tax would be reinstated with an exemption amount of $1,000,000.00.

This is important because in many instances, estate planning documents are written with certain tax law concepts in mind. With the repeal of the federal estate tax law in 2010, taxpayers and their advisors needed to review estate planning documents to determine whether changes in the status of the law required a change in the estate planning documents to insure that the goals and objectives of the client would be achieved if that person died in 2010. The repeal also applied to some federal estate and generation-skipping transfer taxes.

While many taxpayers wanted the federal estate tax and generation-skipping tax to be repealed, the consequences of that action had not always been fully thought through or appreciated by taxpayers or their advisors. 

Without the federal estate tax in place, inherited assets would be valued at the original cost of the assets. This concept is known as the "carry-over” basis. It differs from the 2009 approach and the 2011 approach under current law, where the assets were re-valued on the date of death of the deceased, called the "step-up” basis. The difference in the "carry-over” and the "step-up” basis relates to whether, or to what extent, capital gains would be recognized when inherited assets are sold. For example, if someone died in 2009 owning a stock worth $10.00 per share originally purchased for $1.00 per share, the estate, under the rules in effect in 2009, would revalue the stock so that the new cost basis was $10.00 per share. If the beneficiary then sold the stock for $11.00 per share, the capital gain was $1.00 per share ($11.00 less the basis of $10.00). However, under the carry-over basis rules, someone who died in 2010 would be subject to capital gain of $10.00 per share ($11.00 less cost of $1.00). 

Congress diluted the carry over basis by allowing the executor of an estate to allocate assets up to their fair market value at the date of death in an amount equal to $1.3 million. So, for someone who died in 2010, the executor could allocate part of the basis adjustment to the inherited stock to reduce the potential for gain. For many clients, the effect of carry over basis is mitigated, but the costs associated with administering an estate, i.e., the executor’s commissions and attorneys’ fees, will likely increase because of these new and somewhat more complicated rules.

So now what? For taxpayers who have family assets (husband and wife) of over $2,000,000.00, there is uncertainty as to how to deal with the planning and administration of estates. Should we assume that in 2011 the exemption amount per person will be $3,500,000.00 or $1,000,000.00? Decisions need to be made in structuring estate plans and it is likely that more modifications of those plans will be required as Congress changes the law. Thus, both taxpayers and their advisors will need to be more vigilant in updating the estate plans.

While no one has a constitutional right to expect that rules will always be the same, there is nonetheless good policy reasons for some predictability in rules so that taxpayers are reasonably certain about the "rules of the game.” We do not have this today. We should demand it of our representatives. Ultimately, we get what the government thinks we deserve. For those who expect better performance by government, let your representatives know!
For more information on this topic please contact Califf & Harper, P.C. by calling 309-764-8300 or 1-888-764-4999. This article is intended to provide general information regarding the topic discussed herein but is not intended to constitute individual legal advice.

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