Four Dangerous Estate Tax Traps!

Last year, we heard all kinds of predictions that Congress --  or the President -- would not let the estate tax expire for 2010.  Well it did.

This year, when a person dies, the estate is not subject to any Federal Estate Tax.  That is true regardless of how large the estate happens to be.  David Koch could pass away and leave all of his approximately $19 Billion fortune to his legatees and the estate would not pay a cent of Federal Estate Tax.

Of course, there are traps.  Actually, there are four of them.

Trap Number 1.  Tax Basis.  One of the advantages of the old estate tax law was that a person who inherited property from an estate received a "step up in basis."  According to the IRS, "Basis is generally the amount of your investment in a property for tax purposes." The basis is usually the amount that was paid to purchase the property. With the "step up in basis" when a person inherited property the basis was equal to the fair market value of the property on the date of death. Attorney Letha Sgritta McDowell of Oast & Hook gives this example:  "If a person purchased some shares of stock for $5,000, and then later sold the same stock for $10,000, the person’s basis is $5,000, and this person would pay tax on the $5,000 of capital appreciation. If that same person died owning the stock and it was worth $10,000 on the date of the person’s death, then whoever inherits the stock would have a “stepped up” basis of $10,000.  If the person who had inherited the stock sold it for $10,000, then this person would pay no tax on the sale due to the step up in basis."

Now, under federal law,  if the property is worth more $1.3 million (or $3.0 million if it is going to a surviving spouse) the decedent's basis transfers to the recipient. Using Attorney McDowell's example, when the person who had inherited the stock sold it for $10,000, he or she would have to pay capital gains tax on the $5,000 of capital appreciation.

However, in 2011 the step-up basis will return.  This means that those who have substantial assets must consider revising their wills to deal with this year's limited step-up basis provisions and next year's return of the step-up basis.


Trap Number 2.  Gift Tax.  The Federal Gift Tax Law has not been repealed.  This year you may give up to $13,000 to each recipient without reporting the gift.  Otherwise, the maximum amount you can give during your life without paying a Federal Gift Tax is $1 million.  If you give more than that, regardless of the Estate Tax exclusion, you will be taxed at the highest individual income tax rate, which is 35% for 2009 income.  Be careful about making a gift to a trust.  Unless the trust is treated as wholly owned by you or your spouse, every gift to a trust in 2010 is taxable.  This means that you must be very careful in designing any gifting strategy so that you can give the most and be taxed the least.

Trap Number 3.  States Still Charge Estate and Inheritance Taxes.  In Massachusetts the estate tax is a transfer tax on the value of the decedent's estate before distribution to any beneficiary.  Any estate with a value over $1 million is subject to the Massachusetts Estate Tax.  The amount of tax is equal to the amount of the maximum credit for state death taxes using the Internal Revenue Code Section 2011 in effect on December 31, 2000.  For example, if a decedent were to die with a Massachusetts taxable estate of $1.5 million, the estate would have to pay Massachusetts Estate Tax of $64,400. The tax must be paid within 9 months of the date of death, so it is essential for individuals with assets in excess of $1 million to ensure that their estate contains adequate liquid assets to pay the tax on time.

Trap Number 4.  The Estate Tax Is Coming Back.  The way the law is written, in 2011 all estates in excess of $1 million will be subject to a Federal Estate Tax, with a highest marginal rate of 55% and a surcharge for mega-estates, unless Congress acts in the 20 weeks left of this year's session.  That means, if a person dies in 2011 with a taxable estate of $1.5 million, the Federal Estate Tax Due would be $555,800!  Of course, the estate would also have to pay the Massachusetts Estate Tax and be sure that the taxing authorities received the full payment within 9 months of date of death!

Call Your Lawyer.  Avoid The Traps.  Estate planning doesn't have to be hard, and it doesn't have to be expensive.  And, a good estate plan can save you and your loved ones hundreds of thousands of dollars.  The attorneys at Shoffner & Associates know what to do and how to do it right.  They'll design a plan that is right for you and your budget.  Call us today at 617-369-0111.