Wednesday, February 10, 2010
THE LAW IS AN ASS. DID DWIGHT JUST SAY THAT?
"THE LAW IS AN ASS" is the famous statement by the Charles Dickens character, Mr. Bumble.
A ridiculous set of tax rules are now in play that apply to people DYING IN 2010 ONLY.
That's right, these new tax rules only apply to people who die this year.
Among them is the one-year repeal of the "step up in basis" rule concerning a decedent's estate.
In simple terms, the "step up in basis" rule prior to 2010 allowed the "basis" in an asset of a deceased person to "step up" from the fair market value at the time it was acquired to the fair market value at the time of death.
For example, if grandfather had acquired stock in the company he worked for back in the 70's for $2 per share, his "basis" would be $2 per share. If the stock was worth $100 per share today, and he sold it, his capital gain would be $98 per share. If he was in the top tax bracket, that would be result in a capital gains tax of $14.70 for each share sold.
If grandpa died in 2009 (under the old rules), and left the stock to you, your tax basis would have been the value of the shares at the date of death. If the stock was worth $100 per share at the date of death, and you turned around and sold it for $100, there would be no capital gains tax.
If grandpa dies in 2010, you inherit grandpa's cost basis along with the stock, and you would be subject to the capital gains tax of $14.70 per share.
But, if grandpa hangs in there and doesn't die until 2011, the "step up in basis" rule goes back into effect and the stock would then have a $100 tax basis per share.
Of course, this assumes the government will not come up with some other silly rule before 2011.
To be fair, there is a partial replacement for the repealed basis step-up: Executors will be able to increase the the basis of estate property up to a maximum of $1.3 million for a single decedent or $3 million in the case of property passing to surviving spouse.
This sounds great, but consider this example.
A widow in 1970 uses life insurance proceeds to purchase income rental apartments for $100,000. She manages these apartments as her sole income while she raises her four children.
She dies in 2010, and the apartments are now worth FMV $2 million. Her four adult children don't want to manage the apartments and they sell the property for $2 million. They will have to pay capital gains tax on the $700,000 over the $1.3 million maximum allowable step up.
If she had died in 2009, they would have paid no tax.
The above examples and discussion have been simplified for purposes of discussion. There are other factors which affect cost basis, and could lessen the impact of the capital gains tax in some cases.
What is frustrating to estate planning attorneys and clients is how arbitrary the application of the law is, especially in this case, when the rules only apply to decedent's dying in 2010.
Maybe Mr. Bumble was right.
DWIGHT EDWARD TOMPKINS
Attorney at Law
This blog is intended for informational purposes only and is not intended as a substitute for legal advice from a qualified estate planning attorney in your jurisdiction.
Labels: Capital Gains Tax, Estate Planning, Estate Taxes, Law, Legal Advice, Life Insurance, Step Up In Basis
I help people protect their families through affordable, personalized estate planning. Tompkins-Law.com I am in solo practice in Orange County, California where I focus on estate planning, family trusts, living trusts, wills, corporations and business succession planning. I speak Spanish and serve the latino community. Fideicomisos-Testamentos.com