CRACO & ELLSWORTH, LLP

“In this world nothing can be said to be certain, except death and taxes.”

-Benjamin Franklin

Without a doubt, if Ben were alive today, he would be scratching his head about the curious changes to the “death tax,” i.e., the Federal estate tax, that took effect on January 1, 2010.  The changes are sweeping, but of an extremely limited duration.  Here are the highlights of the 2010 Federal estate tax landscape:

1. The estate of an individual who dies in 2010 is immune from Federal estate tax, irrespective of the estate’s size.
2. The Federal generation skipping transfer tax (a tax, in addition to the estate tax, imposed on transfers to grandchildren and more remote descendants) is repealed for 2010.
3. The income tax basis rules for inherited property are markedly different for 2010.  Previously, the value of inherited property was adjusted for capital gains tax purposes.  This adjustment, often referred to as a “step-up,” essentially meant that inherited property could be sold shortly after death free from capital gains tax.  Now, inherited property will be subject to a bizarre patchwork of income tax rules, including application of “carry-over” basis to certain property.

Creating a great deal of uncertainty is the fact that the above rules are due to expire on December 31, 2010.  Unless Congress acts, as of January 1, 2011, we will once again have a Federal estate tax and GST tax.  Moreover, current law provides that the 2011 estate tax exemption amount will revert to $1,000,000, which is what it was prior to the passage of estate tax legislation in 2001.  On the positive side, 2011 will also bring a repeal of the “carry-over” basis mentioned in #3, above.

If you have any questions about the estate tax or any estate planning issues, please feel free to contact me.