George Gray, Esquire's Blog

Now that Congress has returned from the Easter recess, it will have a number of tax issues to face. Among them is the Estate Tax "mess" created by its inaction in 2009. While the House passed legislation addressing the Estate Tax in early December 2009; the Senate has not yet taken up the matter.

Under the House Bill (the "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.") the Unified credit amount for Estate Tax would return to $3.5 million and the unified credit amount for the Gift Tax would remain $1.0 million. The highest Estate and Gift Tax rate would be 45%. The hope is that the Senate will take up consideration of a Bill with similar provisions; that the House and Senate Bills will be reconciled and that the legislation would be signed by the President sometime in 2010. It is expected that any Legislation passed and signed into Law will have a retroactive date of 01/01/2010.

Conversations that I have overheard indicate that the Senate will consider provisions that will set the unified credit amount at least at $3.5 million and that the highest Estate and Gift Tax rate will be less than the 45% mark set by the House Bill. The imponderable is the Government's voracious need for revenue to offset the deficits created by the Economic Relief Package and to be created by Health Care Reform. The need to raise revenue may temper Congress' inclination to afford taxpayers true and permanent Estate Tax relief. For example, Congress could reinstate the Estate Tax unified credit amount to $3.5 million but extend it only two years, causing the whole mess to be revisited and opening the door to a larger Estate Tax bite on decedent's Estates after 2013. One favorable note which indicates some measure of relief to taxpayers is in the offing is the Resolution passed by Congress earlier this year. In that Resolution Congress exempted from the the normal "pay-go" provisions any extension of Estate Tax relief. This gives many analysts reason to speculate that someting very close to the House Bill will be passed into Law this year.

A sleeper issue caused by Congress’ inaction on the Estate Tax is the matter of the "stepped-up" basis of assets owned by a decedent at his/her death. The Economic Growth and Tax Relief Reconciliation Act of 2001 instituted modified carry-over basis rules where some, but not all, of the property owned by a decedent would be stepped up to the fair market value at the date of death. Some property would retain a tax basis as determined by the original purchase price (however long ago and forgotten). You can imagine the book-keeping headache for beneficiaries of an Estate as they attempted to determine the original purchase price of an asset. Aunt Mable didn’t keep those records from sometime in the 50’s when she bought the AT&T stock, but you are charged with the responsibility to determine the exact date of purchase to determine the gain on the sale of that inherited AT&T stock after her death. Under the rules as they existed in 2009 and earlier, you didn't have to worry about the original purchase price of an inherited asset, its basis was "stepped-up" to the date of death value in all instances. Thankfully, the House Bill would repeal the modified carryover basis rules. Under the House Bill, property acquired from a decedent who dies after Dec. 31, 2009, generally would receive date-of-death fair market value basis (i.e., "stepped up" basis) under the basis rules in effect in 2009.