+David Shulman

South Florida Estate Planning Law Blog

Insight & Commentary on Estate Planning, Wills, Trusts, Probate & Taxation

Welcome to the Year Without an Estate Tax (for now)

I honestly never believed that it would happen.

I never thought that Congress would actually be this irresponsible.  After all, they’ve known that it was happening since 2001.  But here we are.  It is 2010 and there is no estate tax.  For now.

What does this mean?

First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million.  So for most people, it means absolutely nothing.  

However, along with the temporary repeal of the estate tax, there is also a temporary repeal of what’s known as step up in basis.  Let me explain.  Generally, when you inherit assets from someone, your basis in the asset is the value at the time of death.  So that when you go to sell the 100 shares of IBM that you inherited from Grandma, you don’t have to figure out how much she paid for it.  You only have to figure out what it was worth at the time of her death.

With the repeal of the estate tax, there is also a repeal of the step up in basis rules.  Instead there is "carry-over basis" and a decedent’s estate will have $1.3 million of basis to spread around their various assets.  How will this be done?  I don’t know.  But the effect is actually a tax increase on estates valued between $1.3 million and $3.5 million.

Then, one  year from now, the estate tax comes back to life with a $1 million exemption, and a 55% rate.  

Of course Congress could change all of this.  Most people agree that they can retroactively change the law to reinstate the estate tax.  I’m sure there will be lawsuits if they do though.  

What is going to happen?  I have no idea and anyone who says they do is lying.  I was so sure that they weren’t going to let repeal happen, and I was wrong.  So we’ll just have to wait and see.

But don’t throw momma from the train just yet.


About the Author

David ShulmanDavid is a Fort Lauderdale attorney with a law practice focused on estate planning, probate and trust administration, asset protection, guardianships, and tax. Among other things he is a Mac nerd, BBQ lover, and blogger. Follow him on Google¬†or Twitter.View all posts by David Shulman →

  • Hi David: nice explanation of why this year matters to “the rest of us.” Most of the talk I’ve heard has focused on the elimination of the estate tax, when most likely, the largest effect will be felt by these estates that fall under the $3.5 million limit, but are counting on the step-up basis. I think this aspect has been much less publicized in the last few months, and if it had been, may have gotten the public’s attention and hence more of Congress’s attention. It will be very interesting to see what happens next.

  • Gai-jin

    Re: Tax Increase for estates between 1.3M and 3.5M —
    Wouldn’t that ‘increase’ only affect estates with assets that have increased in value significantly since the deceased purchased them?
    (I’m sure most estates of that value do have investments which have appreciated that much, but I’m trying to understand your post/the law better.)

  • That’s a good point. You are correct that if there is not a large increase then it would not matter. But in many situations, people, especially older people, will have held on to assets for decades.