7.1.2010 Estate Planning
What Has EGTRRA Wrought?
In 2001 Congress passed the Economic Growth and Tax Relief Reconciliation Act. It was touted as eliminating the Federal Estate Tax. At that time, the unified credit for gift and estate purposes was $1 million. In 2004, the unified credit increased to $1.5 million, then $2 million and then $3.5 million in 2009. This was also true of the Generation Skipping Tax a/k/a “GST.”
In 2010 under EGTRRA, there was to be no Federal Estate Tax. However, Congress created an indirect tax when the estate exceeded $1.3 million. Prior to 2010 when an individual died, the basis of their property for capital gains was increased to the value of the property as of the date of death. In 2010, the step up in basis was replaced with what is known as carry over basis. You now use the basis when the asset was purchased or date of death value, whichever is lower, to determine gain. As a result, capital gains tax is now due on the difference between the carry over basis and the sale price, which results in an indirect death tax on the difference. To protect smaller estates, the Executor is permitted to elect a step up in basis up to $1.3 million.
The bad news is that the Federal Estate Tax comes back with a vengeance in 2011 as to estates and gifts of 1 million dollars. A short summary of the differences are set forth below:
- No Federal Estate Tax
- No GST Tax
- Gift Tax credit 1 million dollars
- Carry over basis
- Capital Gains Tax on sale price less carry over basis after allocation of $1.3 million basis, $3 million additional credit acquired by surviving spouse
- If estate exceeds $1.3 million, a large transfer tax return must be filed
- Unified credit and Gift Tax credit 1 million
- Taxable assets over 1 million taxed at up to 55 percent
- GST tax exemption 1.1 million
- Step up basis back into effect
- State Death Tax credit restored
Most Estate Planners never anticipated that Congress would not act to change EGTRRA by 2011. The House of Representatives and the President support a credit of $3.5 million. The Senate has not acted. Estate Planners are struggling with how to advise clients. We at Peacock Keller are prepared to discuss the impact upon your estate plan. Stay tuned for updates.