Hip Hip Hooray! No More Estate Tax!

As you may have heard, as of January 1, 2010 the estate tax has disappeared. Sounds great, right? Not so fast!

While the Estate Tax has been eliminated, the income tax has not! And with the elimination of the Estate Tax, came the elimination of the Step up in Basis, and the return of the Modified Carryover Basis.

These are technical terms, so what does this mean? Simply stated, adjusted basis is what you have invested in the asset – for a security it would be what you have invested into it (original cost adjusted for any dividends that have reinvested). So what is a Step Up in Basis?

In December of 2009, if a person passed away, and left his or her investments to the children, the children’s basis would be the value of those assets on the date of death of the person who passed away. When a child would sell an asset, they would owe tax on the difference between the current fair market value and the basis. That part doesn’t change. What changes is that without the Step Up in Basis, the basis from which the taxes due is calculated is the deceased parent’s basis (what they paid for the asset).

What is a Modified Carryover Basis? In a nutshell, Carryover basis is, the lesser of:

Deceased’s adjusted basis, or

Fair Market Value on date of death.

The current law allows for up to $1.3 million (plus up to $3 million for surviving spouse) in gains to be stepped up. This means that any gains above the limit receive NO STEP UP at all – and the basis from which the tax will be calculated will be the basis of the deceased parent. Of course, there are restrictions and these step ups are NOT automatic, but have to be elected by the executor, or personal representative.

Now, we all try to be really good to track what our basis is on all of our investments, after all – our CPAs impress upon us how important that is. From experience, more people than not DON’T track the basis (especially if their investment firm has not assisted them in tracking it for them). And if it is this difficult for your own investments, how difficult would it be in a time of grief at the loss of a loved one, to determine what their basis was on an investment.

In addition to your heirs’ potential income taxes due, there are also changes relating to the Generation Skipping Tax and the Gift Tax rates.

So what do you do?

First – pull out your estate planning documents (and if your parents are still alive, suggest they do the same). Take a look at your planning documents to determine how the amount of assets that will fund a trust, or pass to the next generation is determined. If it is formula based – you will need to speak with your attorney and ask them to review the documents; they may need to be revised or restated. Because if the amount to fund a trust to provide for living expenses for your surviving spouse is arrived at through a formula related to the Applicable Exclusion Amount, since that amount now doesn’t exist, the trust may not properly fund.

Second – pull out your financial statements and ensure that costs basis information is available for all of your assets. If not, you need to be aware that if you don’t know what your basis is, how will your heirs be able to determine the basis. For securities, most investment firms (if that is where you bought the asset) track this for you. But what about investment property? What about if you had held stock certificates, and didn’t buy them through your current investment advisor?

Third – listen to the podcast of Dave Ness, President of Raymond James Trust Company; explain the implications of the elimination of the Estate Tax. (available on the website www.raymondjames.com/experts/ness.htm)

Fourth – call for advice. It has been said that there are two estate planning systems – one for the informed/engaged, and one for the uninformed/inactive individuals. To plan effectively, you must become informed and act!

Tish Wold is the founder and Certified Financial Planner TM at Belleair Wealth Strategies, an independent firm located at 645 Indian Rocks Rd, Belleair Bluffs, Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. You can reach Tish at tish.wold@raymondjames.com or 727-641-8634.