Ron Stone

The federal estate tax rules for 2010 changed.  For this year only, there is no estate tax.  Any Estate Plan currently in place should be reviewed promptly to make sure unintended consequences are not lurking within the Plan that may negatively impact the beneficiaries.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (the “2001 Act”) was believed to contain provisions that would repeal the estate and generation skipping transfer (“GST”) tax for future years;  in effect,  this year, 2010, is the only exempt year.  This one-year exemption from estate and GST taxes may now result in capital gains tax for the beneficiaries of an estate. 

Elimination of the estate tax means that when an asset transfers to the beneficiary, the asset retains the decedent’s basis.  Prior to this year, when assets transferred to a beneficiary there was a “step-up” in basis.  A step-up in basis means the beneficiary would have no tax to pay on the asset if sold immediately upon transfer, even if the asset had appreciated in value significantly since its acquisition by the decedent; instead, the new tax basis of the asset is based on the market value of the asset at the time of death, so there is no taxable gain. 

In 2010 only a partial step-up in basis is available, limited to $3,000,000 for a spouse and $1,300,000 for a non-spouse beneficiary. Since the entire estate is not “stepped-up,” there is a planning opportunity to identify which asset should receive the step-up treatment.  Without planning, the step-up will be allocated pro-rata over all assets.  If one asset has appreciated more significantly than others, allocation of the step-up to that particular asset will allow the beneficiary to reduce capital gains taxes. Additionally, in 2010, a complete estate tax plan should include a list of assets and the corresponding tax basis figures for those assets (with documentation), as the beneficiaries may have difficulty finding this back-up  information once the decedent is gone. 

This one-year relief from the estate and generation skipping tax (“GST”) may justify increasing bequests to grandchildren and reducing bequests to children.   In previous years, the GST made it more costly to “skip” a generation, resulting in a larger estate for your children and estate taxes paid by both the grandparent and then the parent.  Skipping the parent and giving directly to the grandchildren, results in avoidance of double taxation.  If the decedent died without changing her Estate Plan, there may be an opportunity for the children to disclaim their inheritance and have it pass directly to the grandchildren.

Members of Congress have stated that they will reinstate estate taxes retroactively to January 1, 2010, but since Congress has trouble agreeing on anything, the future of estate taxes is unclear at this time.  It may be worthwhile to review your estate plan to ensure your goals are being met.  Being proactive can ensure that the Estate Plan can be carried out according to the decedent’s wishes.

Ronald C. Stone (Ron) is the principal of Profit Planners West and Stone Consulting with over twenty five years of business advisory, accounting and tax experience. Additionally, Ron is the Editor in Chief for Micro Cap Review.  Prior to Profit Planners West and Stone Consulting, Ron was the Chief Financial Officer and Operating Officer of Ronco Corp.; a NASDAQ bulletin board traded Public Company. Ron has also been CFO/COO of an entertainment company and CFO of an engineering manufacturer. Ron had his own CPA firm in Beverly Hills and worked there for 15 years. Ron holds a Bachelor’s degree in History from University of California, Los Angeles.