Estate Tax No Longer! Capital Gains Tax Now!

By M. Dee Biesterfeld and Michael W. Sutherland

At least for now, no federal estate tax exists. Congress did nothing to keep the federal estate tax law from expiring on December 31, 2009. Although we expect Congress to reinstate the tax, we do not know when or what retroactive effect it will have.

The concern now must be on potential capital gains tax. As of January 1, 2010, if you leave stock or land, or other assets to your heirs, they will face the possibility of a substantial capital gains tax.

If you bought a stock many years ago at $20 that is worth $80, and died last month still owning that stock, your heirs would then have a stepped-up basis to the value on the date of your death. So if your heirs sold it at $85, they would have a capital gains tax to pay on only $5 of gain. This has changed.

Unless an exception applies, if you die this month your heirs would have no stepped-up basis, so if your heirs sold the stock at $85, they would have a capital gains tax to pay on $65 gain. Furthermore, the heirs would have to scour through your records to determine how much you paid for each stock - sometimes not a small task. Thank goodness, the surviving spouse will be able to step-up as much as $3 million in capital gain basis for "qualified spousal property" and other beneficiaries will be able to step-up as much as $1.3 million of capital gain basis.

The capital gains tax laws include other complications, as well. As an example, taking losses may be beneficial if timed to occur before death rather than including them in the aggregate that is passed to heirs. You should consider a review of your own situation with your tax accountant or planner.

U.S. TREASURY DEPT. CIRCULAR 230 NOTICE: Unless expressly indicated, any U.S. federal tax advice included in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. Where appropriate the addressee should seek advice concerning the matter from an independent tax adviser.