Will They or Won’t They? An Update on Federal Estate Tax Law

My first post of the year (1/4/2010) concerned the elimination of federal estate tax for this year and this year alone.  While that sounds like a good thing for the average American it’s not really because the law also eliminated the capital gains step up in basis.  So many estates which never would have been subject to estate tax (or capital gains tax) may now face capital gains tax, unless Congress decides to retroactively reinstate the old law, which it was unable to do at the end of 2009.

 We are now 7 months into the year, the first estate tax returns for those who died in 2010 are due in less than 2 months, and still nothing concrete from Washington.  Many estate plans have built in flexibility in terms of placing assets into trusts to take advantage of the tax laws.  The problem is that if we don’t know what tax law is in effect how can anyone know what choices to make?

 The latest word is that a reinstatement of the old law is unlikely.  At least that is what Senate Finance Committee Chairman Max Baucus of Montana said last week.  Democrats want the reinstatement of a $3,500,000 exemption.  Republicans want to eliminate the tax entirely.  That would certainly be welcome news to families such as that of the late owner of the New York Yankees, George Steinbrenner.  Neither side has the votes to get what it wants, however, a compromise that is now being floated may be good news for all.

 Congress could permit more modest estates to elect to benefit from the step up in basis rules that were in effect last year.  This would mean, for example, that if you inherited, at your dad’s death, his house or stocks that he held for many years, the basis for calculating capital gains tax is not what he paid but the value of the assets at the date of his death.  So, if you sell those assets shortly after his death you owe no capital gains tax.  This way, the 2010 law would benefit everyone, not just the wealthy.

 While this makes a lot of sense, as we all know, that isn’t going to be enough to carry the day.  Lawmakers will be taking their traditional summer recess in a few weeks.  It’s not clear whether anything will happen but this all should come to a head in the next several weeks.  Stay tuned.