Estate tax elimination could cost heirs

"The executor is going to have to figure out how to allocate that $1.3 million of basis," says Massey, "to try to determine which assets the heirs are going to likely sell and add the basis increase to those assets so they can make use of that increase."

At the very least, says Trenholm, "without the step-up in basis as it exists, there's going to be an awful lot of extra record keeping."

Why the really rich aren't bothered

If estate tax opponents do ultimately prevail in permanently ending the tax, won't all heirs face the same step-up- versus carry-over-basis issue, regardless of how large their inheritances?

Yes, but the practical effects can be markedly different for the very wealthy and the slightly wealthy.

"More people of the middle to upper-middle class, rather than the very rich, will be affected," says Trenholm. "Mom and Dad worked very hard and kept the house very nice and wanted to see that home pass throughout generations. But the kids find it's too much to handle. The house is too large, and they want to use it to fund their children's educations."

If the "very nice" house is worth more than $1.3 million, not unusual in some real estate markets, the heirs will face a tax bill when they sell.

The very rich, on the other hand, tend to hold on to inherited property. They are not as likely to need to convert an inherited asset to cash, so they avoid the step-up problem and reap substantial benefits in terms of estate tax savings, says Massey.

And where very rich heirs do sell an asset, he says, they generally have enough money from other sources to cover the tax cost.

Both Massey and Trenholm say that for most people, the optimal estate tax modification would be to keep the tax, but increase the exemption level and maintain the current step-up rules.

That's the plan under the bill passed by the House of Representatives in late June. The measure, however, is stalled in the Senate. And some lawmakers on both sides of Capitol Hill are adamant that they will only accept full repeal of the estate tax.


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