Congress has failed (shamefully and spectacularly, IMHO) to fix federal estate taxes.
Those dying in 2009 had $3.5 million exemptions above which values were taxed at 45%. Asset values were fully stepped up. That meant that if an estate’s assets were valued at $5 million, the heirs’ basis was $5 million. This affects capital gains tax liabilities should those assets are sold.
Under the current system (IRC Section 1022) people dying in 2010 pay no federal estate tax. Step-up is limited to $1.3 million ($3.0 million for assets passing to surviving spouses). Taxpayers choose how to allocate step-up to specific assets’ basis. (That complex issue is not one business appraisers have to worry about.) Heirs’ basis becomes the lower of stepped-up basis or fair market value.
People dying after 2010 have $1.0 million exemptions above which values are taxed at up to 55%. Asset values are fully stepped up.
For all years, taxpayers have $1.0 million lifetime gift tax exclusions and pay 35% taxes on gifts above that. The annual gift exclusion is $13,000 in 2010. There is no change in the definition of fair market value (hurrah).
The 2010 rules will change, but nobody can say when, how, to what, whether changes will be retroactive to January 1, 2010, or even if such a retroactive tax (increase) is constitutional. If a hugely wealthy person dies (I can think of one living in Omaha) while current rules prevail and their estate is retroactively taxed, there could be a Supreme Court case in the offing, and it might take years to resolve.
As long as current 2010 rules stand, there may even be a reversal of traditional incentives. Historically, taxpayers wanted low taxable values and the IRS wanted high ones. Right now, taxpayers may want high (fair market) values to increase their heirs’ basis and reduce capital gains taxes while the IRS may want low values (to reduce basis and increase capital gains taxes). I use the word “may” because of the inherent flexibility of the limited basis step-up allocation to individual assets. Case-specific circumstances such as expected appreciation rates and planned asset sales will make each situation unique and potentially very complicated. Although appraisers in estate tax matters have to be independent and objective, it certainly helps to understand and empathize with our clients’ and advisors motives and dilemmas.
Despite these dilemmas, I hope that you have a happy, healthy and prosperous 2010!