Do you have to pay Estate Tax in 2010?

Since 2000 I have heard the mantra over and over again, ‘if you die in 2010 you don’t have to pay estate tax. Even Bill Gates does not have to!’ Well, the truth of the matter is that even if he, or for that matter ‘you’, died in 2010, your heirs may not pay estate tax, but they may be liable to pay a tax on the difference between what you paid for the asset and the sale price of the asset. In layman’s terms, if grandma bought a house for $40,000, died in 2010, and you inherited the house and sold it for $100,000, then you owed the government taxes on the difference of $60,000. So in lieu of an estate tax, there is a ‘carryover basis’ of valuing the asset at date of death. The reality is that there is a ‘step up in basis’ of $3.5 million that a surviving spouse can claim. So maybe there is no tax; but the problem is that the IRS has not set out any rules, issued any federal regulations or forms to cover the eventuality of dying in 2010. No one expected the inaction of Congress on the matter. So CPAs, estate planning lawyers and the IRS are left wringing their hands over the inaction. And more complications for residents of states that levy a state estate tax, that may have not been repealed along with the repeal of the federal tax. In Missouri, there is no estate tax. If you have property in Illinois, there is an estate tax on estate valuations over $2.0 million. So farmland may be affected or even real estate developers dying in 2010 who may owe no federal estate tax, but may owe Illinois estate tax. The irony of the matter is that a taxable estate of over $5 million would pay federal estate tax of $675,000 in 2009 and $1,653,400 in 2011, if Congress does not change the law. This affects farmers and other growers, small business persons; people who do not fit the ‘rich’ mold. But the larger the estate, the lower tax the estate would be liable to … estates of $50 million would pay $20.9 million in 2009 and less than $20 million in 2011, if the law is not changed! I don’t think that that is what was intended. So in 2011, the federal government will collect more federal revenue on inheritance money than it did in 2009. In 2011, the largest estates would pay less as a percentage of value. Warren Buffet must be smiling.

See you in my next post.

Nalini S Mahadevan, JD, MBA

Attorney at Law

Copyright 2010.  All rights reserved.

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