While proponents of the 2001 estate tax “repeal” touted the tax bill as great tax relief for those impacted by estate taxes, the reality of the new law falls short of that claim.
The extreme complexity and temporary nature of the estate tax repeal, along with the ongoing advisor consultations seemingly required annually to keep up with the ever changing face of the law’s provisions, greatly reduce any relief provided by this new tax law.
The changes are part of the massive Economic Growth and Tax Relief Reconciliation Act of 2001 signed by President George W. Bush on June 7.
At first glance, the estate tax provisions in the new law seem like good news. However, the bill contains some less obvious items that can cost you or your heirs dearly if you don’t take appropriate steps to avoid them.
Fluctuating timing provisions further complicate the bill , some changes are retroactive, some immediate, and still others don’t take effect for five or 10 years. Perhaps the biggest planning problem with the new bill is that it “sunsets” in 2011. This means in 10 years the estate tax laws will revert back to the 2001 levels. It will literally take an act of Congress to prevent the sun setting.
Add to that the inevitable changing face of Congress , the next election is in 2002 ,that body’s propensity to tinker with legislation, and the increasing budgetary demands and you’ve got a planning nightmare.
– Beneficiaries Can Be Affected
Here are just two common situations that could impact unsuspecting beneficiaries based on the new tax law.
o Repeal of Step Up in Basis Rule
Let’s assume the bill remains in effect as currently written until 2010. In that year, a wealthy uncle dies leaving a valuable real estate. Because he died in the “best year possible” , 2010 , his estate would not be subject to tax.
However, unlike today’s provisions that allow for a step up in basis to fair market value for inherited property, the basis for the property remains at the uncle’s original basis.
That means that if the beneficiary sells the property, he may be responsible for capital gains on the value of the property in excess of the uncle’s original cost basis.
The tax burden shifts from the estate to the beneficiary , from the estate tax to the capital gains tax. It’s even more complicated because the bill, within limits, allows a modified step up in basis for $1.3 million of assets.
