Carryover Basis Complicates Planning / Settlement

I have been asked a lot of questions about the new carryover basis rules and what this means for someone who inherits property in 2010. Simply put, repeal of the federal estate tax that has taken effect in 2010 means that the stepped up basis that the inheritor would have received in 2009 and prior years is officially gone.

The good news is, that for most smaller estates, the practical effect of the change is non-existent. Moderate and larger estates, however, will now find additional taxes, and complications.

A stepped up basis means that the recipient of an inherited asset gets to increase the income tax basis of the asset to its date of death fair market value, which in turn is the basis used for calculating capital gains taxes when the inherited asset is sold. But not so now - instead for deaths occurring in 2010 an heir will receive the decedent's original basis in the inherited asset, which can be adjusted by the executor or personal representative using the new modified carryover basis rules. The personal representative call allocate additional basis to the property received by the beneficiary, in order to reduce the capital gain.

In 2009 and years prior, for example, if a beneficiary inherited a house that cost the decedent $500,000 but

No Estate Tax in 2010 - Good and Bad News

There is currently no tax on the estates of those dying during 2010.   Although it is possible that Congress could reinstate the tax retroactively in 2010, the possibility is uncertain, at best.  If Congress fails to act, however, although a few wealthy families will benefit, many families with smaller estates will pay capital gains on inherited assets.  Moreover, executors and successor trustees must contend with new, and what may prove to be significant, administrative burdens.

Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has increased over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more.

For persons with larger estates, their estate plans will need to reviewed and reconciled with the lack of