Estate Planning Guide
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R.I.P. estate tax ... maybe

The basis bombshell

Another reason most believe the repeal will be stopped is the basis issue. Basis is the cost, or value, of an asset that is subtracted from its sales price to determine net profit. Tax then is generally due on that profit amount.

Under current law, when a person dies, basis in any bequeathed asset is "stepped-up" to its market value on the date of death. For example, your grandmother bought a stock for $10,000. To keep things simple, we'll ignore things that could have added to the stock's basis. She left you that stock, which on the day she passed away was worth $100,000. If you inherited the stock this year, your stepped-up basis would be $100,000. You could turn around and sell it for that amount and owe no tax.

But in with the estate tax repeal in 2010, carryover basis will be used instead. This would mean if you inherit your grandmother's stock next year, you'll also inherit her $10,000 basis in the asset.

Realizing the hit some heirs could take, tax law does allow for two types of basis adjustments in 2010: a $1.3 million aggregate basis increase and a $3 million spousal property basis increase. That year if you, as a nonspouse, inherit property worth more than $1.3 million, you'll have to choose which of the assets you want to be included in the stepped-up basis allowance. You'll owe tax on any other assets based on the original basis.

Those decisions and calculations could get very complicated. Or, says Eva Rosenberg, a Northridge, Calif., enrolled agent and editor of the Web's Ask TaxMama newsletter, without the current full market-value-at-death step-up in basis, "life would a shambles."

"We count on not selling certain assets because we don't want to deal with it, where we have assets that were purchased years ago and we're unable to determine the cost," says Rosenberg. "It's too expensive to figure that stuff out. Now if somebody dies, we have a way (stepped-up basis) to establish a tax basis for some things."

And even with the basis options that will remain after the state tax's repeal, some heirs of a $3.5 million or less estate that is now exempt from the tax could benefit more if the current law and full-market-value step-up system is retained, says Massey.

Ways and Means Committee Chief Tax Counsel John Buckley noted such situations at a Tax Governance Institute Web cast in September. The number of estates that would benefit from repeal is tiny, he said, when compared to those that would suffer from the loss of stepped-up basis.

Realizing that, it's safe to assume that Congress will want to make sure the law benefits as many of their constituent taxpayers as possible.

Why Congress can wait

The big issue remains, however, as to when the estate tax repeal will be stopped. Congress is notorious for letting tax laws lapse and then reinstating them retroactively. Many argue that dealing with estate tax issues in that way would be difficult and possibly unconstitutional.

Not so, says Jeffrey N. Pennell, professor at Emory University Law School in Atlanta, Ga. A specialist in income tax, wealth transfer tax, trusts and estates and estate planning, Pennell's treatise on the subject examines a unanimous 1994 Supreme Court decision that held a retroactive change to the estate tax was constitutional.

As for practical issues, an estate tax return generally is due nine months after the date of death. So, notes Pennell, that gives lawmakers until September 2010, the first filing due date for estates of those who pass away next January.

There also are some other reasons Congress might put off changing the estate tax law, says Pennell.

There could be some political gain on both sides of the aisle. "It's probably tongue-in-cheek, but there are people who believe that Congress wants a chance to point fingers, place blame," says Pennell. "Democrats can say to Republicans you created this mess so that come Jan. 1 we'll have people pushing mama from the train. And Republicans can wag their fingers and say to Democrats you were in control and could have fixed it in a timely manner."

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