What are you advising clients about estate tax repeal?

[Martin Shenkman]

Estate tax repeal is real, .... well maybe. Congress might retroactively reinstate the estate tax. Then again they might not. The gift tax rate is currently 35% and is scheduled to be 55% next year if Congress doesn't act. Carry over basis is now the law. What are you advising clients to do in light of estate tax repeal? How are you advising them to plan?

[Bob H]

I set up a meeting with the client and their attorney. Its the attorney's job to make the projection. I have my own opinion, but no one knows for sure what will happen.

If I go with the attny opinion, then we're good. If I go against it and they're right? I have a problem.

[Martin Shenkman]

Bob.....


It is not only the attorney that must be involved.



o Right now we have carryover basis rules. So if a financial planner or wealth manager is trying to advise an estate they will need to understand and calculate the gain that will be realized on any transaction. for older clients or those with health issues the present reality of carryover basis needs to be considered in planning.



o For insurance planning the insurance consultant needs to be proactive. It is not clear that you can make gifts to an insurance trust (ILIT) right now if that trust is GST (generation skipping tranfser tax) exempt becuase there is no GST. So from an insurance perspective an analysis needs to be done for many trusts to determine if the policy can sustain itself until Congress makes up its mind about the law. If the policy is not sustaining then then perahps a loan or other arrangement can be made to fund the policy to avoid a tax uncertain gift to the ILIT.



o Projections and budgets by planners. If you are doing a financial plan for a second or later spouse, what does the prenuptial agreement say? For example, if the prenup says that your client will receive 50% of the estate of the deceased spouse and that definition is keyed to estate tax terms under current law your client might recieve zero instead of an anticipated substantial inheritance. That has to be factored into budgeting and investment planning unless your client, after being informed of the risks opts not to.





o GRATs - now may be the time to jump on GRATs. See the separate thread/question on this topic.



o Title to assets is in the purview of the finanical planner responsible for the accounts. Perhaps the approach under the current estate/carryover basis uncertainty is to retitle non-retirement accounts as tenants in common so that whichever tax paradigm applies the clients are protected in that whichever spouse dies first he/she will have 1/2 of the value of assts (estate tax) or 1/2 of the appreciation of assets (carryover basis) to fund planning.



There is no crystal ball that any estate planner has. But updating documents and planning creatively can serve all clietns well and help every professional involved with that client do a better job.



Marty

[Kathleen Bryan]

What is the GST Exemption for 2011 if no additional legislation is passed in 2010 and the old rates revert? I have seen the GST Exemption for 2011 shown as $1 million in various publications, the same as the estate tax exemption... however there was an inflation adjustment for GST, where there was none for the estate tax exemption. I have also seen the 2011 GST Exemption for shown as $1.3 milliion and $1.34 million recently, so some are assuming inflation adjustments. If the GST Exemption is $1 million plus post 2002 inflation adjustments, what would those adjustments be? Where can I find the real number?

[Bradly T.]

Well...I've got one and need some help. Elderly client just died, no spouse. Owns $2mm in land with very low basis and $1mm in old stock with zero basis. Daughter and granddaughters inherit by direct beneficiary on all assets and property. Probate avoided.


Now, $1.3 million in gain is excluded. Valuation and basis must be determined. Isn't gain tax only on realized gain by sale of property/asset? Lost step us does not mean taxes due at inheritance does it? But at future sale?



What if estate tax is reinstated? If you inherit today without a step up but step up is back when you sell the asset, what then? What a mess!



Should they sell assets (preferred) up to the exclusion amount of gain and hold rest until law changes? Will future change even impact death settlements occurring now?

[Bradly T.]

Forgot one...since there is no estate tax and basis is carried forward, I presume the capital gains tax is reported on the beneficiary's income tax return when gain is realized? So it is a beneficiary tax? Thankfully, my state has no death, inheritance, or estate tax.....yet. But I assume the future gain realized is reportable to and taxable by the state.

[Kathleen Bryan]

Bradly, you are correct that gain is only realized on a sale, therefore the tax impact of carry-over basis will be realized on sale of an inherited asset, not upon inheritance. Also correct that capital gains tax is a part of the income tax regime and reportable on one's state and federal income tax returns.

The personal representative allocates the $1.3 million in basis step-up to specific property, and that becomes the new basis. It makes sense to allocate it to appreciated property that is likely to be sold. For instance if there are 3 surviving children and one piece of appreciated real estate, the kids probably do not want to own that together, so it is likely it would be sold. You say in your case there is zero basis stock as well.. would the stock be sold or would the kids want to hold it? Which has the greatest gain? The personal representative will have to consider these things in allocating basis.

It used to be that when an individual died the property was appraised to determine date of death value for estate tax purposes and for step-up of the basis to date of death value. What to do when there is no estate tax or step-up? If no valuation is made, then estate tax is reinstated retroactively, you could always have a valuation performed at that time.

As for what happens if estate tax is reinstated by allowing 2011 to arrive without new legislation, my guess is that the carry-over basis will be the basis for those who inherit in 2010, but who knows - it proved to be unworkable before. It's possible new legislation might address this mess and it is possible it will not.

[Tad Borek]

Well...I've got one and need some help. Elderly client just died, no spouse. Owns $2mm in land with very low basis and $1mm in old stock with zero basis. Daughter and granddaughters inherit by direct beneficiary on all assets and property. Probate avoided.

How frustrating - with uncertainty in the estate tax sitting on the investments might lead to losses greater than the eventual tax difference. Or might pay off big time.

If any of the beneficiaries have unrealized capital losses on other investments, or capital loss carryforwards, that could affect the decision. An idea that's intriguing me has that $2M in land turning into something else through 1031 exchanges. E.g. carefully done it could be a way to acquire homes for the beneficiaries and eventually make use of the gain on sale exclusion for a principal residence.

Interesting the choice b/t allocating basis to land or stock. An individual stock could lose most of its value quickly, which is an argument for giving it the basis and selling it. But also, it might be sold without tax given enough time (through loss offsets or selling over a period of years by those in the 15% bracket or below).

Or: "pay the tax." After moving to Nevada!

-Tad

[Lucullus]

Appropos of Carry Over In Basis -

The estate tax law that is currently in place was part of the Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA). That law will "sunset" on December 31, 2010. As I understand "sunset", it means that the law, from January 1, 2011 forward, shall be as though EGTRRA had never been enacted.

If that is truly the case, then it may be that, for the heirs of a taxpayer who dies in 2010, and whose estate includes appreciated property, "carry over in basis" should not be an issue (regardless of whether or not the Executor allocated basis adjustment to such property), so long as the legatees do not dispose of the property in 2010.

Why? If "carry over in basis" and "allocation of basis adjustment" are inventions of EGTRRA (and they are) and if the law on January 1, 2011 and after shall be the law in place before EGTRRA, as if EGTRRA had never existed, then the "carryover in basis" in such inherited property not disposed of in 2011 (when EGTRRA was in force) will have "sunset" with the rest of EGTRRA.

I wonder if counsel for the heirs of any taxpayer dying in 2011 will assert that argument.

- John (I'm not an attorney, but I play one on the Internet) Olsen

[Bradly T.]

John - My CPA and I had same thought. Use gain exclusion this year, realize all other gain in subsequent year(s). Not sure who, what, or how 2010 "lost" step ups would ever be documented and tracked over time??


That Nero....he really can play a tune!!