A Lump of Coal and a Gold Nugget

The federal estate tax is due to die at midnight on December 31, unless Congress acts. As the witching hour approaches, it appears increasingly unlikely that Congress, dealing with the health care legislation and other critical matters, will have time to address the federal estate tax.

For some persons who inherit property in 2010, the absence of an estate tax will be a blessing, and for some it will be a horror show. For lawyers and accountants it will be a headache - producing a great deal of work of the type we do not enjoy.

As the law now stands, every estate is entitled to a credit which covers the tax on the first $3,500,000 of assets. Property in excess of $3,500,000 is taxed at a maximum rate of 45 percent. But this is only part of the picture.

When you inherit property, under the present system, that property receives a "stepped-up" basis - the basis is increased to the value of the asset at the time of the decedent's death. For example, assume that Uncle George, who died recently, bought stock over a period of many years; his purchases included McDonald's Corporation, Microsoft, and other securities.

Uncle George, like many of us, did not keep careful records of the cost of these securities, which he bought at various times and in various amounts. Under present law, Uncle George's cost, or "basis" does not matter, because the basis "steps-up" to the value at his death.

If the estate tax law is not extended, next year there will be no step-up in basis - those who inherit property will take the "carry-over basis" -- that is, Uncle George's cost. Trying to determine what that cost was will be a horror show for lawyers and accountants. The absence of a federal estate tax will be like finding a lump of coal in the Christmas stocking for some people, and finding a gold nugget for others - all depending upon their circumstances.

I will write more about the estate tax law and post it on our website, where you will find information about many other subjects, including

income taxes, estate planning, probate, and Medicaid. I wish you all good things for the season, and a Happy New Year.