The Estate Tax in 2011: Retroactive Estate Taxing for 2010?

One of the biggest business and political hot-button questions/issues was a relatively simple one: What is going on with the taxing of estates in 2010 and 2011? Are estates in 2010 exempt? What are the rates for 2011? If a family member dies in 2012, what happens to their estate?

Throughout 2010, I wrote multiple times about the "current" state of the estate tax, and each time, provisions and popular opinion changed slightly. Attention was initially drawn to the estate tax (at least in Texas) due to the death of Dan Duncan, a wealthy Houstonian whose estate avoided millions of dollars (at least) of tax, but no one was sure if retroactive taxing would take place in 2011.

As it turns out, families of those who died in 2010 have a choice: They can choose to follow either the 2010 or 2011 estate tax rules. They are different, especially when it comes to inherited property. Though oversimplified, here are the basic distinctions between the two:

The 2011 Rules took effect on January 1, 2011 and are made up of the following basic premises: estate tax will be paid only if the taxable estate is more than $5 million, and you will get an advantageous "stepped-up basis" in all inherited property. What is important is that the value of the inherited property is based on the date of death. In other words, if you inherit the property and sell it later on (presumably for a profit), you will pay a capital gains tax based only on the value of the property as of the date of death. It is the sales price less the "stepped-up" basis. With the current state of the economy and real estate, when property is concerned, this is a good option because property has not appreciated much in the last few years.

If you choose to follow 2010 rules, you will: not pay any estate tax, no matter how large the estate, but be subject to modified "carryover basis" rules. Again, the "carryover basis" rules apply to inherited property. This is a much less forgiving rule for inherited property than the 2011 rules because the amount of capital gains taxes you will owe will likely skyrocket. Simplified, a carryover basis means that the inherited property basis is what it was for the previous owner, plus expenditures related to capital improvements. The amount of capital gains you will owe will be based on the older (and likely lower) amount, meaning more tax will be owed.

Whatever you decide, be sure to discuss the specific implications with your attorney and accountant to ensure that you choose the most advantageous option for you and your family.

Related:

A Final Look at the Estate Tax 2010 (December 2010)

The State of the Estate Tax Follow-Up (June 2010)

The State of the Estate Tax (March 2010)

Resources:

http://www.nolo.com/legal-encyclopedia/article-32263.html

http://wills.about.com/od/understandingestatetaxes/qt/Overview-Of-2011-And-2012-Estate-Tax-Laws.htm