Its officially 2010. In the estate planning world that means we have crossed over into the dark side, entered the wild west, and journeyed to the next frontier. That’s right, no action was taken on capital hill and that means the estate tax, or death tax as it has affectionately become known, for 2010 is repealed.
What does this really mean? Well before you start doing backflips or praying for your rich, 99 year old great Uncle Carl to hurry up and die already, let’s take a quick look at where this actually leaves us:
No estate tax in 2010?
Hardly! All indications from congress point toward enactment of a new estate tax regime over the early part of the year which will be made retroactive to cover all estates dating back to the first of the year.
Capital gains trap?
If no action is taken by congress the tax holiday may be more like a trip to the dentist than to Disney World. There will actually be tax due on many estates that otherwise would have been exempt under the previous $3.5 million minimum for the federal estate tax. This is because the repeal includes the provision providing a step-up in basis on the assets passed to a decedent’s heirs. What this really means is that when a beneficiary inherits grandma’s stock or property, the beneficiary will have to pay tax on the difference between what grandma bought it for and the value when it is sold. (And good luck figuring that out in some situations where decades of splits, mergers, and dividends have clouded the cost basis picture.)
Just give it to the grandchildren?
Not so fast. Repeal of the estate tax does repeal the generation-skipping tax (GST), which would allow those who may die this year to pass all of their assets to their grandchildren without penalty. This would avoid any tax being assessed on the assets when their children eventually pass them on again at their death. Sounds good but if you plan this way and the tax is reinstated retroactively, these assets will be hit with the 55% (or newly revised similar rate) generation skipping tax. Thats a hefty price to pay for a gamble if it doesn’t pay off, especially since all signs suggest the odds are against it.
What should you do?
Unfortunately it appears that the best strategy right now may be to hurry up and wait. Too much planning right now to try to take advantage of what may simply be an illusion of a tax holiday could result in some serious adverse consequences. There will be plenty to do once the dust settles and we have a clearer picture of what the future holds.
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