Imagine No Estate Tax

8:15 am Uncategorized

The federal estate tax is scheduled to disappear next year (in 2010); and although most people expect lawmakers to pass legislation keeping the estate tax alive, they also vaguely hope that the estate tax (also sometimes called the “death tax”) does disappear—at least for a little while. But this article in the Wall Street Journal asserts that for all the noise that is sometimes made about the estate tax, we may actually be better off with the estate tax than without it.

This assertion is not based on what is best for the government, but what is best for the tax-payer, and has to do with something called the “step-up in cost basis”:

“Step-up means that the property heirs receive is valued as of the date of death. So if Grandma leaves a grandchild stock selling for $75 a share that was bought in 1970 for $2 per share, the heir’s “cost basis” in the stock is $75. If the grandchild then sells the stock for $80, the taxable gain is $5 per share.”

If the estate tax disappears it is likely that the step-up in cost basis will as well. This means that the stock Grandma leaves you would be valued at the original $2 per share rather than the stepped up $75 per share, and when that same stock is sold for $80 per share the taxable gain would be $78 instead of $5!

The disappearance of the step-up in cost basis is just one of the concerns people have about the possible elimination of the estate tax and Congress’s failure to act.Other concerns mentioned in the Wall Street Journal article include:

  • A retroactive estate tax
  • A prohibition (or scaling back) of techniques used to trim estate taxes (such as family limited partnerships, grantor retained annuity trusts, and qualified personal residence trusts)

With all of these possible changes on the horizon, the time to take advantage of tax saving techniques offered by your estate planning attorney is now, while they are still available.

Help is available to you by contacting your Southern California financial planning experts today.

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