What a mess we have in the tax laws for 2010! For one year only, 2010, there is a law that applies to “stepped-up basis” for estates of individuals who died in 2010. Why do you care? Well, the heirs of someone who dies in 2010 can save thousands of dollars in taxes if they take the proper steps. If they fail to act in certain circumstances, they can pay thousands of extra tax dollars that could have been avoided.
Prior to January 1, 2010, if a person died it was possible to get a new basis for Capital Gains purposes.
The Capital Gains tax is a federal and state of Idaho tax that is imposed on the sale of an asset if the asset is sold for more than the original purchase price, and the cost of any improvements. For example, if a share of stock was purchased for $10 per share and it was sold for $110 per share, there is a Capital Gains tax on the appreciation of $100. Between the Federal and Idaho Capital Gains tax, the $100 increase will be taxed at slightly less than 25% or approximately $25 in tax will be due.
When someone dies, it is possible to get a “stepped-up” basis, which is the fair market value of that asset on the date of death. In the past this could be done easily by getting the value of the investment from the accountant or broker, or getting an appraisal for the value of real property on the date of death.
1. Under the current 2010 law, if a decedent’s gross estate value (excluding cash) is less than $1.3 million, no filing of any kind is required. The basis of the decedent’s capital assets will be automatically adjusted to fair market value as of the date of death, but proof must be available to show the date of death value.
2. If a decedent’s gross estate (excluding cash) is over $1.3 million but the total appreciation in the decedent’s capital assets is less than $1.3 million, the decedent’s personal representative must file a form (not yet published) with substantial financial information in it. This form is due by the filing date of the decedent’s final income tax return to allocate the appreciation to the appreciated assets. If this is not done no upward adjustment in basis will be allowed at all.
3. If the total appreciation in the decedent’s capital assets is greater than $1.3 million, then a true allocation will be required, as the available basis adjustment will have to be parceled out by the personal representative among all of the items in the decedent’s bucket of capital assets, eligible for a basis adjustment.
The end result is a post-mortem filing with the IRS is required for estates in excess of $1.3 million if the heirs want to minimize the Capital Gains tax that may be due upon the sale of estate assets.
Assuming no change in the law, in 2011 we will go back to the simpler, days of an automatic step up in basis for Capital Gains purposes.
P.S. I’ve been out of town the last few weeks, first attending a statewide meeting in McCall where attorneys from all around Idaho met for a day to share information and learn more about the Idaho Medicaid Program. and last week grading exams in Las Vegas for applicants to become nationwide Certified Elder Law Attorneys. Currently there are approximately 450 Certified Elder Law Attorneys.