I honestly never believed that it would happen.
I never thought that Congress would actually be this irresponsible. After all, they’ve known that it was happening since 2001. But here we are. It is 2010 and there is no estate tax. For now.
What does this mean?
First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million. So for most people, it means absolutely nothing.
However, along with the temporary repeal of the estate tax, there is also a temporary repeal of what’s known as step up in basis. Let me explain. Generally, when you inherit assets from someone, your basis in the asset is the value at the time of death. So that when you go to sell the 100 shares of IBM that you inherited from Grandma, you don’t have to figure out how much she paid for it. You only have to figure out what it was worth at the time of her death.
With the repeal of the estate tax, there is also a repeal of the step up in basis rules. Instead there is “carry-over basis” and a decedent’s estate will have $1.3 million of basis to spread around their various assets. How will this be done? I don’t know. But the effect is actually a tax increase on estates valued between $1.3 million and $3.5 million.
Then, one year from now, the estate tax comes back to life with a $1 million exemption, and a 55% rate.
Of course Congress could change all of this. Most people agree that they can retroactively change the law to reinstate the estate tax. I’m sure there will be lawsuits if they do though.
What is going to happen? I have no idea and anyone who says they do is lying. I was so sure that they weren’t going to let repeal happen, and I was wrong. So we’ll just have to wait and see.
But don’t throw momma from the train just yet.