Merry Taxmas! House OKs tax bill
Financial advice from holiday 'experts'

Estate tax extension through 2012: Nudging mama off the train in two years?

With Obama's signing of the compromise tax deal yesterday, the really wealthy were among those who got an early tax present.

Some of the House Democrats railed against this latest version of the estate tax, but in the end, it passed.

For 2011 and 2012, estates worth $5 million or less won't be taxed at all. For estate values greater than that, a 35 percent tax rate will apply.

That's better than the 2009 law, which imposed a $3.5 million exemption and a 45 percent tax rate on the excess. And it's much better than what would have happened had the Bush tax cuts expired. If that had happened, estates worth more than $1 million would have faced a 55 tax rate.

The bad news, though, is that Congress has set up a repeat of 2010. Unless it acts again in two years, the $1 million/55 percent rate law will be back.

Black humor created end of estate tax: When the estate tax repeal provision, which lasts until Dec. 31, was first announced, morbid jokes were made about how folks would be pushing mama (and daddy) off the train to ensure they passed away while there was no federal estate tax in place.

Now we find ourselves again facing a deadline in which tougher estate tax provisions are on the horizon. While the new law is not as tax friendly as the current no-estate-tax law, it's still pretty darn good.

The head of the American Bar Association's section that focuses on estate law estimates that less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. That's minuscule compared to the 10.5 percent of estates that paid Uncle Sam in 1977.

So while rich parents and other potential benefactors might not be pushed from a train these next two years, who's to say that there won't be some nudging.

Basis issues: One of the drawbacks of no estate tax this year was the lack of stepped-up basis.

A temporary fix was made, but still, some heirs would have benefited more under the old rules that applied an estate tax and let them value inherited property at its market value on the day their relative passed away. Otherwise, they also inherit the carryover basis of the property, which is in simplest terms what the dearly departed paid for the property.

The stepped-up basis means that if Uncle Henry left you his XYZ stock worth $100,000 on the day he died, that 100 grand is the basis you inherited. If you then sell XYZ for $150,000 you owe taxes on the $50,000 profit.

But with carryover basis, you got not only Uncle Henry's XYZ shares, but also his $25,000 basis (for our example, that's what he paid when he bought them in 1950) in the property. So now when you sell it for $150,000 your profit is $150,000 less $25,000 or $125,000 capital gain upon which you owe tax.

At least the capital gains rates are still at 15 percent for most folks for the next two years. But 15 percent of $125,000 is an $18,750 tax bill. But with stepped up basis, the tax bill on 15 percent of $50,000 is $7,500.

Under the Obama compromise, folks facing basis issues have a choice.

Where individuals have already passed away or do so in these final days of 2010, that person's estate has the option to apply the impending estate tax rules (35 percent tax rate and $5 million exemption with stepped-up basis or to go with no estate tax but the carryover basis of the property left by the decedent.

Some, but not a lot, of planning time: As I noted, my example is very simple and for illustration purposes only. The estate tax in whichever incarnation it's applied is quite complex.

But if you or yours are wealthy, at least now you've got a couple of years to meet with an estate tax professional and sort out what moves are best for all concerned.

And, of course, wait for the tax train to pull into Do This All Again station on Capitol Hill in 2012.

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