Death Tax(s)
The 2010 Tax Relief Act signed into law at the end of December 2010 provides relief from the uncertainty I discussed in my Article in August of 2010.
For decedents dying in 2010 and thereafter, non-spousal heirs inherit up to $5.0 million Estate Tax exempt with the surplus at a 35% top tax rate and a full step up in basis of all assets. Spouses continue to have an unlimited exemption from Estate Taxes. The cost basis step up is unlimited to the entire estate.
For decedents dying in 2010 the Estate Personal Representative may opt out of the 2010 Tax Relief Act and instead pay no estate tax. However; under this option there is a limited cost basis step up of $1.3 million for non spousal heirs + an additional $3.0 million for a qualifying spouse.
The executor or trustee should make whichever choice would produce the lowest combined estate and income taxes for the estate and its beneficiaries. To make this determination requires an analysis of the original cost basis of each asset, the total adjusted gross value of the Estate and educated estimates on what future income tax capital gains taxes might be when the beneficiaries might sell the property. Please see my Article titled: "How is cost basis important?"
The present Washington State inheritance tax exemption is $2.0 million. For those estate plans that tie the amount of funding of a credit shelter trust to the federal exemption, the heirs could find themselves having to pay a Washington Estate Inheritance tax for the amount over $2.0 million upon the first spouse's death. This is one risk in "formula gifts" that could cause unintended tax consequences as well as skewing the intended gift to various beneficiaries, particularly in blended families.
How do these tax laws affect me?
- If you have $2.0 million or less this situation will probably not impact your heirs.
- If you have a current estate over $2.0 million and an Estate plan that established a Credit Shelter Trust (CST) to maximize federal tax exemptions for a married couple in a "formula gift" manner, that estate planning document should be immediately reviewed by a qualified estate planning attorney.
I must add a disclaimer to be fair. This is a short article of a highly complex topic. Your specific intent combined with your circumstances must be independently reviewed by you with your Estate Planning Attorney to implement an Estate Plan.