Dec 20, 2010

Congress Passes 2 Year Extension of Estate Tax


Dear Liza: What did Congress just pass last week with respect to the estate tax? Congress passed a big, complicated tax bill last week. Many of its details will have to be worked out in the coming months, as the IRS issues forms and regulations that will clarify some of what's in the bill, but, for our purposes, here are the highlights:

  • The bill expires in two years.
  • Individuals can pass up to $5 million to their heirs free of the estate tax.
  • Surviving spouses will be able to use the unused exemption (that's that $5 million) of the first spouse to die, so couples will be able to pass $10 million in assets free of the estate tax.
  • The maximum federal estate tax, gift tax, and generation-skipping tax rate is 35%.
  • Individuals may make gifts of up to $5 million free of the gift tax, but this amount is reduced by the amount of previous gifts.

Estates of those who died in 2010 have two options: they can use the new rules, and pay tax only on assets over $5 million, or they can elect NOT to pay the estate tax, but instead pay capital gains on most of what they've inherited using the decedent's tax basis, not the asset's value at the date of death. This "carry-over basis' rule is one of the main areas in need of clarification, and if you have any question at all about whether or not it would benefit you, please see an estate planner and an accountant in the next nine months.

Here's a good summary of the bill in the New York Times.