Plan to Pay more Estate Taxes and it Might Pay Off

As we enter the New Year, we are all aware that there was no estate tax in 2010 and a new $5 million exemption this year.  However, for those who passed away in 2010, their estates have the option of retroactively applying the new law with the $5 million exemption.  I’m sure you are asking yourself, “Why would anyone voluntarily pay an estate tax?”  And the answer is in the treatment of basis for inherited assets.

With the elimination of an estate tax came the elimination of an automatic stepped-up basis in 2010.  With a stepped-up basis, inherited assets are transferred to heirs with a date of death value for the tax basis.  Under the 2010 law, there was a modified carryover basis.  With a carryover basis, inherited assets are transferred to heirs with a tax basis equal to the original cost of the property.  The modified version of this carryover basis in 2010 allowed executors to increase the basis of assets by up to $1.3 million, which eliminated the tax on that much appreciation.

For some estates, it is more beneficial to calculate the capital gains with a stepped-up basis since the tax rate is only 15%, and thus apply a law that has an estate tax as well.  An estate planning attorney can help figure out the best way to handle this years estate taxes.