Estate Tax Lotto

In 2001, President Bush signed a law that will eliminate all estate taxes in 2010. Unfortunately, the law contains a sunset provision that would repeal the law in 2011 causing estate taxes to be due on estates that exceed $1 million. Currently if your estate, including life insurance that you own, was less than $1.5 million, you would owe no estate taxes. In 2006, this tax-free amount climbs to $2 million. In 2009, the tax-free amount will be $3.5 million. As you might imagine, for people with large estates, planning the year of your death has become quite a vexing problem. If you can just hang on until January 1, 2006, you could save $225,000 (45% of the additional $500,000 tax-free amount). Live until January 2009, you save an additional $900,000. Live one more year and you owe no taxes (Warren Buffett, take notice!). Best to ‘pull the plug’ before January 2011 or you’ll owe up to 60% of everything over $1 million!

This is complete nonsense and Congress is attempting to do something about this situation this summer. Earlier this year, the House of Representatives passed legislation that would permanently repeal the estate tax. One flaw in the House bill is that along with the repeal of the estate tax there would also be the repeal of the ‘step-up’ in basis. Under current law, when you die, the tax basis of your non-retirement assets are ‘re-set’ based on the value on the date of death rather than what you actually paid for the asset. This means that if you bought a piece of property for $100,000 that is worth $1 million at your death, your heirs could sell it and avoid the capital gains tax. Retaining the step-up basis rules at death is vitally important from a tax planning perspective. First, many people keep poor records so determining cost basis is often problematic. Second, owing a large capital gains tax will discourage heirs from selling assets that often should be sold in order to properly diversify a portfolio.

The current proposal being negotiated in the Senate is a sound compromise between outright repeal and loss of the step-up in basis rules. Senators Jon Kyl (R-Arizona) and Max Baucus (D-Montana) are urging fellow senators to retain the step-up in basis rules with Kyl recommending an $8 million exemption with a tax rate that is tied to the capital gains tax rate (currently 15%). An $8 million exemption ($16 million for married couples), particularly if indexed for inflation, is large enough to resolve the estate tax issue for the vast majority of Americans including small business owners and large independent family farmers. If you favor the current proposal or want to express your opinion, you need to act fast since the vote is likely to happen by the end of this month. You can contact your congressional representatives at Send them an email and let them know what you think. Believe it or not, they do pay close attention to what their constituents think.