2010 Estate Tax Update

Posted By: Manish C. Bhatia

According to Bloomberg Business Week, the House Ways and Means Committee planned to begin work in April to retroactively reinstate the federal estate tax on multimillion-dollar estates that expired on December 31, 2009.  The legislation would likely extend the 2009 law, which applied a 45 percent tax rate on the value of estates that exceeded $3.5 million per individual.  One possibility being considered would give heirs the option to pay the very complicated capital gains tax that replaced the estate tax for 2010 if that is more beneficial to the estate.

The estate tax was replaced on January 1, 2010, with a capital gains tax that requires heirs pay rates of between 15 percent and 28 percent on any bequeathed assets they sell.  The reason that the capital gains tax is so complicated is because it applies to all profit since the assets were acquired by their original owners, thus requiring the estate to locate records that may be several decades old in order to determine the decedent’s basis in the asset.

Needless to say, the estate tax will return in some form in 2011, and may even be applied retroactively to the beginning of 2010.  Due to the uncertainty, it is crucial to make sure that your estate planning documents provide for flexibility to deal with every situation that Congress may throw our way.