• Estate Planning Update 2011
  • January 26, 2011
  • Law Firm: Hogan Stickel Inc. - Fort Bragg Office
  • Congress concluded the 110th session with a face off between the Democrats and Republicans over the expiration of the Bush era tax cuts.  When the dust settled Congress extended the Bush tax cuts and, further, implemented significant changes to the federal estate tax.


    The purpose of this letter is to explain these recent changes to the federal estate and gift tax.  It is helpful to understanding the recent changes to take a step back to 2010.  As a result of the sunset provisions of the Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA-2001) the federal estate tax was repealed effective January 1, 2010.  At the same time, EGTRRA-2001 added Section 1022 to the Internal Revenue Code (IRC), effective beginning January 1, 2010, which revised a longstanding rule concerning the basis of property acquired from a decedent.  That rule, codified at Section 1014 of the IRC, provided that property acquired from a decedent received a step up in basis to fair market value at the date of death of the decedent.  This meant that the successor in interest to property owned by a decedent could immediately sell the property and recognize little if any capital gain income.  In addition to its obvious salutary tax effects the rule was simple to administer.


    This new Section 1022, on the other hand, is very cumbersome to administer.  Under Section 1022 property acquired from a decedent has a “carryover” basis (i.e., the basis in the hands of the decedent transfers to the estate).  Generally the carryover basis will be the decedent’s cost.  This carryover basis, in turn, is subject to increase by allocation of some part of a $1.3 million aggregate basis step-up provided for by the statute.  The upper limit on increase for any asset in the estate is the fair market value of the property at the date of death of the decedent.  A separate purse of $3.0 million is available to the surviving spouse to increase the basis of assets acquired by the surviving spouse.

    While for many small estates the tax consequences of Section 1014 and 1022 were ultimately the same the administrative burden of having to research the basis of assets in decedent’s estates required by Section 1022 was a looming nightmare for many estates and trusts.



    Perhaps reflecting the Internal Revenue Service’s doubts as to the permanency of the 1022 basis rules the Service had not finalized a form for providing the required information by the end of calendar year 2010.


    That brings us to the new law.  The Tax Relief, Unemployment Insurance Reauthorization Act of 2010 (PL 111-132) reinstates the federal estate tax back to January 1, 2010 with a $5 million exclusion ($10 million for married couples) and a maximum estate tax rate of 35%. 

    Effective December 31, 2010 the new law allows “portability” between spouses of the maximum estate tax exclusion.  PL 111-132 also restores the step up in basis rule for decedent’s estates under Section 1014.  For gifts made after December 31, 2010 the gift tax is reunified with the estate tax, with a unified exclusion amount of $5 million and a top estate and gift tax rate of 35%.


    Simply making the new estate tax retroactive to January 2010 was, however, a legislative minefield.  This is because there were several decedents who passed away in 2010 leaving sizeable estates.  Attorneys for those estates would presumably be highly motivated to challenge such “ex post facto” type legislation.  In an apparent attempt to mitigate that possibility, PL 111-132 allows estates of decedents who died in 2010 to elect out of the estate tax.  In so doing, such estates must comply with the carryover basis rules.


    As a sobering caveat to all of this it bears noting that PL111-132 is only a stop gap measure.  The extension of the Bush era tax cuts and revision to the federal estate tax expires in two years.  If Congress takes no action the estate tax returns to a single graduated rate schedule with a top rate of 55% and a $1 million exception for both gifts and bequests.


    Should you wish to discuss any of these changes and how they might impact your estate plans do not hesitate to call for an appointment.