Estate planning rules - anybody’s guess

Doug Horn

At the last meeting of the East Tennessee Financial Planning Association Chapter, members were updated on current estate planning issues by Anne M. McKinney, Esquire, a recognized Knoxville legal authority on estate taxes. Per the IRS’s web site, this tax is becoming less important due to recent declines in the number of returns filed. Depending upon Congress’ actions, this trend may see a sudden and significant reversal.

During 2002 and 2003, the exemption was $1 million per person, and the number of estate returns filed in 2003 was 72,540. By 2006 the exemption amount had risen to $2 million. The most recent year the IRS has information on the number of returns processed is 2008, and only 38,373 returns were filed that year. For 2009, the exemption increased to $3.5 million, and fewer returns should be expected due to the increase in the exemption and the impact the market had on values.

Now that 2010 has arrived, the estate tax was repealed by action of the legislature during the Bush administration. But, that does not mean there is no tax. During the years the estate tax was in place, this tax only impacted those with significant assets by imposing the Federal tax on estates with values in excess of the exemption. This permitted most estates to avoid Federal estate taxes because their value was below the exemption amount. However, there was a second feature to the estate tax rules that did benefit everyone that is no longer in place as of this year. This was the automatic step-up in basis. Prior rules stated for those inheriting property, their basis for determining gain or loss when the property was sold was the value of the property on the date of death. Thus the small farm purchased years ago for $500/acre and is now worth $3,500/acre, when sold by the heirs for $3,500/acre there was no gain, provided it was inherited in 2009 or before.

With the repeal of the Federal estate tax, the automatic step-up was also repealed; therefore, as of 2010 the heirs’ basis in the inherited property will be the basis of the decedent. The impact of this change will actually impact more citizens than the estate tax since anyone who inherits property may have to report a gain when the property is sold since the basis is no longer the value at death, but the prior owner’s original cost or their adjusted tax basis. In the past, most estates were not impacted by Federal estate taxes, and thus was not a major concern to very many. However, now that the basis carries over when the inherited assets are sold, far more families may be paying a capital gains tax, than paid estate taxes.

The Legislature is attempting to “fix” this and there are no less than four bills being considered, each with their own unique attributes. The estate taxes will be brought back to life, so no tax ever goes away forever. There is even talk of making the bill retroactive to the first of this year, but this raises serious questions. The exemption varies depending upon the bill, and may be different from current proposals as the bills move forward. In the event nothing happens, the Federal estate taxes come back in 2011 and the exemption returns to the $1 million level.

This is clearly a time when ignorance of the law may result in far more taxes being paid than those who plan in accordance with the current law as well as what is anticipated. Being aware of the changes that are forthcoming may also prove very beneficial.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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