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Ilyce Glink
No one ever thought it would get this far.
Years ago, when then President George Bush proposed increasing the estate tax exclusion in stages, and eliminating the estate tax entirely in 2010, no one ever thought we'd get here without having some sort of permanent fix in place.
Yet here we are, in the second month of 2010, with another big estate tax deadline looming: On January 1, 2011, the estate tax reverts to where it was in 2001.
Instead of figuring out how to treat the estates of those who die,
Through the end of 2009, tax law provided each individual with a
Estate assets were also given a full step-up in the basis, meaning that if a person died owning a piece of property they had purchased for
The estates of those who die in 2010, however, will pass down to heirs free of estate tax and generation-skipping transfer tax. But the property in that estate will no longer have that stepped up basis, but rather the basis that it had when it was purchased. When they sell that property, they may owe capital gains tax on the difference in price between the cost basis and the sales price.
Here's how it used to work: Up until the end of 2009, if you passed down property, your heirs would receive the property at its "stepped-up" basis, meaning that the property would be given the value on the date of death rather than the date of purchase.
Because the stepped-up basis has been eliminated as of January 1, 2010, heirs will have to prove the basis for each asset. That could be tough for those inheriting, say, their grandmother's house that was purchased in 1945 and that had several major additions and capital improvements made to it over the years.
The cost basis of property is the price paid for it plus the cost of major capital improvements. Will heirs in the example above be able to prove how much their grandmother paid to redo her kitchen in the 1960s and 1990s? It could be tough if her estate can't find any receipts.
If that
While the full basis step-up has been eliminated, there remains a 35 percent tax on gifts above
If
What does that mean most Americans? Perhaps not much. But for those who die and leave an estate exceeding
Any new law could be written to take effect retroactively. But what happens to the estates of those who die after January 1, 2010, but before new estate tax law is enacted? Those estates that move quickly to parcel out assets and file a final estate tax return may be required by the
Estate tax experts expect to see legal challenges if new legislation forces estates caught in this limbo to go back and live by the new rules. If the legislation gets tied up in court, it could be several confusing years until the mess is straightened out.
What should you do now?
--Make sure you have a will.
You never want a court to decide who gets your assets, or who will raise your children.
--Consider selling assets rather than leaving them to your children.
If you sell your primary residence now, you will be able to take up to
--Pass down cash tax-free.
Current tax law permits you to give a gift of up to
--Fund up to five years of your grandchildren's 529 college savings plans.
You can put in five years' worth of gifts in one fell swoop, effectively sheltering up to
--Watch
Once