Thursday, February 18, 2010

NEW TAX BASIS RULES AND ESTATE TAX REPEAL HAVE COME JANUARY 1st

The impossible has happened.  Congress failed to act at the end of 2009, and so we now have one year without the Estate (death) tax, before it is reinstated in 2011.  What does that mean for you? 

I am reprinting below a short summary provided by the National Academy of Elder Law Attorneys (NAELA).  I have been a member of this organization for over ten years.  This article highlights two issues: the death tax and the capital gains tax.

NAELA’s Tax Section wishes to alert all NAELA members about two huge tax law changes effective on January 1st that will affect many estate plans. These changes are the repeal of the federal estate tax and the cut back of the  important stepped-up tax basis. 

1. Derailed by more important matters in 2009, Congress failed to prevent the repeal of the estate tax for 2010 only. Next year in 2011, the estate tax is reinstated with only a $1 million exemption, unless Congress acts in 2010. There is talk that Congress may even retroactively reinstate the estate tax sometime in 2010. Estate tax repeal could hurt the surviving spouse of someone dying in 2010 if the couple has a Marital Trust/Bypass Trust Plan (also known as an A/B plan), as the wording of the documents may leave all the assets to the bypass trust, cutting out the surviving spouse.  
    
2. The second tax law change introduces new IRC Section 1022, which replaces former IRC Section 1014. New Section 1022 curtails the stepped-up tax basis for capital assets acquired from a decedent. Many read Section 1022 to only allow a step-up for property acquired from a decedent, for revocable trusts, jointly held property, and community property. Some NAELA tax practitioners believe Section 1022 denies a step-up for life estates, all irrevocable trusts and all retained and granted powers of appointment. On the other hand, other NAELA tax practitioners believe that certain irrevocable grantor trusts and life estates will still receive a stepped-up basis. Clients need to be made aware of these issues

The Tax Section, chaired by Robert C. Anderson, CELA, will provide more details on these and other tax changes in the next NAELA News issue to help members get ready to help clients.

Source: NAELA Tax Section Members Robert C. Anderson, CELA; Sharon Kovacs, Gruer, CELA; and Bradley J. Frigon, CELA

What does this mean for you?  The simple answer is no one knows.  Because Congress can adopt a law that may be retroactive to January 1, 2010, there may be no impact on individuals.  The easiest solution is don’t die until Congress straightens this out, or at least wait to die after January 1, 2011, when a new law will be in place.  What a mess!