Ask Liza: Everyday Estate Planning

Hmm. Maybe next year's estate tax exclusion won't go down to a million dollars per person. Bloomberg BusinessWeek reports this week that the Senate Budget Panel has approved a spending plan that includes an assumption that last year's estate tax exclusion of $3.5 million dollars, and last year's top estate tax rate of 45%, will be reinstated. That's really good news for  most of us, who don't have that much money to begin with. It means that most people will be able to pass their estates to their heirs without having to worry about the estate tax.

This may come about via the same reconciliation procedure that the Senate and House used to get health care legislation passed, so, it's not a done deal.

The story reports that "Senate Finance Committee Chairman Max Baucus, a Montana Democrat who is the chamber's chief tax writer, declined to say yesterday which tax provisions could be approved through reconciliation, which would allow Democrats to pass them in the Senate with a simple majority. Democrats control the chamber with 59 votes. "I have some ideas," said Baucus, adding "we don't even have a budget yet" and "we're getting way ahead of ourselves."

Last week I wrote about the 'death' and probable re-birth of the estate tax by 2011, if not sooner. Today, though, I want to tell you about the new carry-over basis rules. Until now, if you inherited an asset from someone who died, you also got a new tax basis equal to the value of that asset at the time of death. That's called a stepped-up basis.

The cost basis is the dollar amount the asset was worth when you purchased an item (with certain adjustments), and it's that value that the IRS uses to determine if there's been a gain or a loss on the sale. You pay capital gains taxes on the difference between the cost basis and the sales price. A higher basis means less of a gain when you sell, if the value of the asset has gone up.

The stepped-up basis was a big tax break for heirs. What it meant is that if your mother left you a house worth $1 million dollars that she purchased for $100,000 and then you turned around a sold it for $1 million dollars, you'd owe ZERO capital gains tax on that sale. And it was an unlimited tax-break, you got that step-up on all of the assets inherited at death.

But not this year. Now, each taxpayer is limited to $1.3 million dollars worth of a stepped-up basis. It will be their executor's job to allocate that to particular assets, like a house, and therefore to specific heirs. There's also a $3 million step-up available to spouses for appreciated assets. But all other assets are to be valued at their original value.

So, if your father purchased stock in IBM for a pittance in 1963, you're going to have to find out what that was and pay capital gains on the difference between that value and what you're selling it for today. That's called a carry-over basis, and it is going to make accountants and heirs nuts as they try and figure out what the original values are for long-ago purchased assets. Not to mention how much fun it will be to pay all those captial gains taxes.

To read more about this, read Kathleen Pender's good summary from the SF Chronicle.

In a twist of Congressional inaction that no one honestly thought possible, Congress, by failing to act, has allowed the estate tax to be fully repealed in 2010. But, and get this, only for one year!

In 2011, unless Congress acts, the estate tax is scheduled to come back at levels not seen since 2001 (the tax would fall on any estate worth more than 1 million dollars and at rates ranging from 37% to 55%). The current law, passed in 2001, expires in 2011, so the tax comes back at 2001 levels, with an adjustment for inflation.

If that's not odd enough, most congressional watchers predict that Congress will actually pass a law re-instating the tax that will be retroactive to January 1, 2010 (so, as a matter of reality, there will be no actual repeal whatsoever!)

Which is to say that no one really knows what will happen over the next few months. But certainly, something will. I'll keep you posted.

For more, see this article in the Wall Street Journal, which offers a nice summary of the current state of affairs.

At the moment, almost all of us don't have to worry about paying federal estate taxes at death. That's because the first $3.5 million of our estates can pass to our heirs tax free. Scheduled to expire in 2010, this limit is likely to be extended by Congress for at least another year and most experts think it is unlikely to be reduced significantly over the next few years.

But here's a new wrinkle--until 2005 most states collected a share of the federal estate taxes collected. But when that 'pick-up' tax expired, they began imposing estate taxes of their own to make up for that lost revenue.

Currently, 16 states and the District of Columbia impose their own separate estates taxes. And several states (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee) also impose an inheritance tax. This falls on those who receive the money when someone dies. And, in many instances, the limit for tax-free transfers for both state tax regimes is less than that federal limit. Which means it's possible for an estate to be free of the federal estate tax while being subject to state estate tax or inheritance taxes.

So, for those doing estate planning in these states, make sure to consider the state angle when considering the probable taxes your heir may face.  

To learn more about federal and state estate taxes, see Nolo's Estate and Gift Tax area.

The current Congressional Budget Resolution includes a provision that will freeze the current estate tax exemption at current levels, allowing individuals to pass up to $3.5 million of their estate free of the estate tax. The resolution also freezes the maximum tax rate at 45%. Even if it passes, this provision expires after one year, leaving the future of the estate tax uncertain. Here's a link to a great article from Money magazine on rethinking your estate planning options, given the current economy and the uncertainty of future tax rates and exemptions.

Animal rights advocates were thrilled last year when real estate mogul Leona Helmsley's will left the bulk of her fortune to a charity, the Leona M. and Harry B. Helmsley Charitable Trust, whose mission statement was to make expenditures for "purposes related to the provision of care for dogs."

But a New York judge ruled in February that the trustees for the Leona M. and Harry B. Helmsley Charitable Trust had the sole authority to decide which charities should benefit from her estate.

And today they've announced 53 charitable grants, the bulk of which went to New York City hospitals and medical research centers. $1 million was divided equally among 10 animal rights charities, including the American Society for the Prevention of Cruelty to Animals and several groups that train guide dogs for the blind.

For more information about providing for your pet after you die, including sample will provisions and a sample contract for vet services, see Every Dog's Legal Guide, by Mary Randolph (Nolo).

Leave it to the U.S. Senate. At a time when most of us are worried about keeping a roof over our heads and paying the essential bills, here comes a proposal from two Senators to -- get this -- lower the estate tax for couples with more than $10 million dollars!

In a move that will benefit the top .2% of U.S. taxpayers, Senators Kyl (R-AZ) and Lincoln (D-AK) are proposing to raise the current estate tax exemption from $3.5 million per person ($7 million per couple) to $5 million per person ($10 million per couple) and to lower the maximum tax rate from 45% to 35%. Estimated to cost the U.S. Treasury as much as $250 billion over the next 10 years, this move is also likely to reduce the amount of planned giving by the very wealthy since such giving is often done, in part, to reduce the estate tax burden in wealthy families.

The Obama Administration has proposed instead to freeze the estate tax exemption at its current level when the Bush Administration tax bill expires in 2011.

To learn more about estate taxes, see Nolo's article Estate Tax: Will Your Estate Have to Pay?.