On May 7, 2010, Bloomberg.com published Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets, by Ryan J. Donmoyer and Margaret Collins.
This article covers the major current issues in wealth transfer planning: uncertainty, confusing rules, the best response (planning or taking a wait-and-see approach), how we got here, and what might be possible.
The article does a good job of capturing the confusion in the current estate planning environment, but it confuses a couple of key points itself.
The title of the article is somewhat confusing.
First, the term “death tax” is a politically charged term when it is used to refer to the federal estate tax.
Second, it is unclear how the “death tax lives in estate repeal.”
- The estate tax is currently repealed for 2010. Some practitioners argue that it is dead, and others argue it is in hibernation. Something in hibernation is indeed alive. It is merely resting. Describing the estate tax as merely in hibernation, however, has political implications, as it suggests that a retroactively imposed estate tax would be Constitutional.
- People still have estates in 2010. “[E]state repeal” is probably short-hand for “estate tax repeal.”
Third, the full title is misleading: “Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets.” If “death tax” means the estate tax, then this statement is not true. The federal estate tax is repealed in 2010. If, however, “death tax” means a tax somehow related to a person’s death, the term might make sense, but it requires a number of assumptions. In 2010, heirs who must sell assets will realize a capital gains tax, if they have built-in gain, and if the executor does not allocate any of the $1.3 million basis increase (or the additional $3 million for qualified transfers to spouses). This tax would be an income tax.
(2) $1.3 million in inherited assets v. $1.3 million in built-in gain
The article reflects this confusion between the estate tax and the income tax. The authors write,
Those who inherit estates worth more than $1.3 million this year face an expensive quandary caused by the repeal on Jan. 1 of the 94-year-old- federal estate tax . . .
A sole heir who inherited assets valued at more than $1.3 million must account for their original cost.
The idea the article is conveying is important: in 2010, heirs must scurry for records to ascertain the basis of inherited assets. The first quoted sentence is misleading because the focus in 2010 is on the built-in gain in the assets and not on the value of an inherited estate. The second quoted sentence is misleading because an heir can inherit assets worth $100,000 in 2010 and could still have to account for their original cost.
Here is the first quoted sentence in context:
Those who inherit estates worth more than $1.3 million this year face an expensive quandary caused by the repeal on Jan. 1 of the 94-year-old federal estate tax, Bloomberg Markets magazine reports in its June issue.
Under a little-noticed twist, these people will owe capital-gains taxes if they sell assets they inherit. And if their loved ones die in 2011, the levies are scheduled to be even higher. Under 2009 rules, which Congress may reinstate, many of them would have paid nothing.
People who inherit assets worth more than $1.3 million this year might or might not have to pay a capital gains tax on inherited assets that they sell. It depends on the built-in gain, if any. It also depends on any allocations to increase basis that the executor might make.
The authors write, “Five months into a year that marks one of former President George W. Bush’s biggest tax-policy changes -- the end of what he called the death tax -- confusion reigns.” Confusion does indeed reign.
(Special thanks to the watchful eyes of Michael Hepner, a benefits professional, and for his input and feedback.)