As stated in last month’s article, the federal estate tax expired at the end of 2009, and this has created a serious problem in allocating capital gains tax. While the federal estate tax has disappeared in 2010, so has the “step-up” in basis.
Suppose you purchased shares of stock many years ago for $25,000, and they’re now worth $100,000. If you had died in 2009, your heirs would get those shares with a “stepped-up” basis of $100,000, so if they sold them right away, they wouldn’t owe any capital gains tax. But if you died in 2010, your heirs would get those shares with a basis of only $25,000, so if they sold them right away, they would owe tax on a $75,000 capital gain. Now add to that a home you purchased many years ago which now has a value of over $1,000,000. If your gross estate is in excess of $1,300,000… your representative could have a problem trying to “allocate the gain.”
Prior to this year, heirs were able to use a “step-up” basis rather than using the cost basis when assets were originally purchased. They could just use the value of the asset as of the date of death. Because of the lack of any estate tax, this change could also create a major headache for many executors or trustees, who will now have to determine the original purchase price of homes, stocks and other assets — often decades after they were purchased, and with scant records. This could be very time-consuming and expensive. The law allows for your estate to “step up” $1,300,000 of assets. If you are married and you transfer assets to your spouse, you can “step-up” an additional $3,000,000 in assets. The problem here will be if you own more than these amounts, your representative has to decide which assets get the adjustment and which do not. If you cannot document the basis, it is easy… the basis is “zero” – which is very bad news.
Based upon the current complexity of these changes, a meeting with your attorney to determine if your current estate plans will be accomplished as intended may be wise.
Ms. MacDonald’s practice is limited to Estate Planning, Probate, Conservatorships, Elder Law and Trust Administration. Ms. MacDonald maintains her practice in the Santa Clarita Valley at 27013 Langside Avenue, Suite A, Santa Clarita, California. She can be reached at 661-251-1300.