Just before the holidays, Congress passed the new law pertaining to estate planning and estate taxes for 2011. So what does the law hold for this year?
On January 1, 2011, the federal estate tax returned. Estates valued at $5 million or less are exempt from the estate tax. Estates valued at more than $5 million are subject to a 35% estate tax rate. While this may seem generous on the federal level, don’t forget that nearly half of the states impose their own estate or inheritance tax, including New York, beginning at much lower levels.
The stepped-up basis on inherited property also returned, meaning the basis for inherited property is its fair market value on the day of the owner’s death. Why is this important? If an heir were to sell that property, their capital gain would be determined on their selling price less the fair market value (with allowable expenses) on the date of death, meaning the capital gain normally would be much less than having to use the carryover basis, which is often the price that the deceased paid for the property plus the value of certain improvements.
For example: For estate planning and inheritance purposes, the carryover basis for stocks and bonds is the purchase price; the stepped up basis is the value of the stock on the day of the death.
Because of the late changes in tax law, certain tax filers will have to wait until mid to late February to file their tax returns, as the IRS is still updating their computer systems with the changes. In addition, the new estate tax laws are set to expire in just two years, at the end of 2012.
So how do these changes impact your estate planning tasks? Changes to tax laws, along with life changes such as marriage, divorce or birth of a child, should trigger a review of your estate planning documents. Working with an estate planning attorney ensures that your plan is kept up to date regarding the current law, as well as your current needs and goals.