It seems like only yesterday, but in fact, it was almost nine years ago that Congress enacted legislation that was ultimately going to phase out the federal estate tax. In 2002, the federal exclusion amount was raised from $675,000 to $1,000,000, and the exclusion amount has increased over the past several years. As of January 2009, any individual can devise and bequeath up to $3.5 million free of federal estate taxes. According to the current legislation, however, in the year 2010 the federal estate tax will be repealed, only to be reinstated in 2011 with the federal exclusion amount reverting to only $1,000,000. New York State has its own estate tax on estates of $1 million or more, but the tax is substantially lower than the federal estate tax.
The estate tax should not be confused with gift taxes. An estate tax is imposed on an individual’s estate when he/she dies. A gift tax is imposed on the giver of the gift in certain circumstances. While New York State does not have a gift tax, there is a federal gift tax on individuals if his/her lifetime gifts exceed $1 million in the aggregate. Certain gifts are not taxed, such as gifts to a spouse and annual gifts that do not exceed $13,000 per individual, per calendar year.
While the notion of a repealed estate tax sounds nice in theory, the ramifications are not necessarily all positive. Currently, the consolation for the imposition of an estate tax is the availability of a “step up” in basis that an estate receives as a result of the death of the decedent. For example, if an individual owns a home that has increased in value from $70,000 at the time of purchase to $770,000, such individual would recognize capital gains of $700,000 upon the sale of the home during that individual’s lifetime. This gain could be offset by a $250,000 capital gains tax exemption if the individual used the home as a primary residence for two of the last five years. Nevertheless, there would still be a significant income tax imposed. However, if the individual holds on to the home until he dies, the estate gets a “step up” in basis. That means that if the house is worth $770,000 at the time of an individual’s death, that amount will be the estate’s cost basis for purposes of determining capital gains. Accordingly, if the estate sells the house for $770,000, there will be no capital gains tax ($770,000 less $770,000 = $0) imposed. Based on the value of the estate, there may be an estate tax if the estate reaches the above thresholds, but there would be no income tax.
If the estate tax is repealed, the step up in basis rules will be repealed as well. Accordingly, an estate that would have been subject to an estate tax, will now have to grapple with applying a carryover basis to assets held by the estate. A carryover basis is the cost basis of the decedent. In the above example, if the carryover basis rules would apply, the home would maintain its basis of $70,000. Therefore, when the home is ultimately sold, there will be significant capital gains tax despite the fact that the homeowner passed away.
While no definitive legislation has yet been enacted, it seems probable that a decision regarding the future of the estate tax will be pushed off until more immediate and pressing issues such as national health care, the overall depressed economy, and the war in Afghanistan are resolved. Accordingly, there is indication from Washington that the current law (i.e., estate tax imposed on assets in excess of 3.5 million) will be extended for an additional year, so that these estate tax issues will be grappled with in 2010. In this economy, our federal legislators certainly don’t want to lose estate tax revenue next year.
In light of the uncertainty of the future of the federal estate tax and the complexity of the rules, it behooves those who are interested in estate tax planning to seek the counsel of an estate/elder law attorney. A good estate plan can be effectuated today that will anticipate the uncertainties of future estate taxes.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Forest Hills, Great Neck, Manhattan, Brooklyn and Cedarhurst, NY. Fatoullah is certified as an elder law attorney by the National Elder Law Foundation. He has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. Fatoullah also served on the Executive Committee of the Elder Law Section of the New York State Bar Association. He chairs the Legal Committee of the Alzheimer’s Association, LI Chapter, and serves on its Board of Directors. Fatoullah is also a co-founder of the Senior Umbrella Network of Queens, and currently serves on its Board of Directors. This article was written with the assistance of Debby Rosenfeld, Esq., a senior staff attorney at the firm. The firm can be reached by calling 718-261-1700, 516-466-4422, 212-751-7600 or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.
