Much has been written and discussed about the absence of an estate tax in 2010. The debate about what Congress may do rages on and is spiced up with stories about the death of George Steinbrenner and others like the Texas billionaire Dan Duncan, but the little publicized truth is that the 1 year repeal of the estate tax actually imposes both taxes and legal fees on much more modest estates.
As part of the repeal, Congress also repealed the step-up in basis rules and substituted carryover basis rules, which means that any beneficiary who decides to sell the assets they inherited will have to pay tax on the gain—the difference between the amount the decedent originally paid for the asset and the amount the beneficiary receives for the asset. As you may imagine, this will result in capital gains taxes on many middle class Americans.
There is a limited exception that could protect many small estates, but only if the value of the estate is under $1.3 million. You may think that you have nothing to worry about, that $1.3 million is a lot of money, but you would be surprised at how many “small” estates are actually large estates. When you take into consideration the value of a home, retirement or savings accounts, a small investment here and a small investment there… the value adds up pretty quickly.
Every estate larger than $1.3 million that fails to file the required report is subject to a $10,000 penalty. The report must be filed without regard to whether there is any property that benefits from the step up or not. The report must be filed with the decedent’s last income tax return due on April 15, 2011. In addition to the report to the IRS, the estate must send a copy of the report to every beneficiary or heir that received property as a result of the death, presumably including recipients of life insurance proceeds and IRAs even though no basis adjustments would apply to those assets.
These rules are complicated. They are not intuitive, require much attention to detail in a timely manner, and carry severe penalties for non-compliance. The 1 year repeal of the estate tax in 2010, while a windfall for the über wealthy, will be a burden and expense on more modest estates. If you have a family member who died in 2010 with more than $1.3 million in property (including a home, life insurance and retirement accounts) transferred as a result of the death, you have only a short time to comply and avoid the serious financial penalties.
It’s a big job, and you don’t have to do it alone. Call me for help today.