Decedant's Income Taxes

Estate Income Taxes

Estate Taxes

Under The Economic Growth and Tax Relief Reconciliation Act of 2001 (Act) the tax exemption amount for federal estate taxes was initially at $1 million, increasing to $1.5 million in 2004, $2 million in 2006 and $3.5 million in 2008 until December 31, 2009. The Act repeals the estate tax for 2010 only, providing for the return of the estate tax in 2011, with an estate tax exemption of only $1 million.

Most advisors expected Congress to take action prior to the repeal of the estate tax at the end of 2009, but Congress failed to take such action. Therefore, presently, the estate tax is repealed for 2010.

Most advisors believe that Congress will take action before the end of 2010 (perhaps retroactively to the beginning of 2010) to reinstate the federal estate tax, possibly with the estate tax exemption in effect for 2009 - $3.5 million, but no one knows for sure.

Another major change effective January 1, 2010 relates to the determination of income tax cost basis for property received from a decedent. Previously, the law provided for a step up in cost basis of such property to its market value as of the decedent's date of death. When such property was sold by the executor, heirs or beneficiaries of the decadent, they had the benefit of the stepped-up cost basis for income tax purposes.

Now, for decedent's dying after December 31, 2009, property received from the decedent during 2010 will have a cost basis equal to the decedent's adjusted basis in the property, or the market value as of the property as of the decedent's date of death, whichever is less. There will be a new aggregate cost basis increase of $1.3 million that can be allocated by the executor to property passing from the decedent and a $3 million aggregate spousal property basis increase permitted for spouses, except that the cost basis cannot increase above the market value of the property.

The date of death determines the what law will apply. For decedents who died prior to December 31, 2009, the applicable estate tax exemption amounts mentioned above will apply.

For decedents dying after December 31, 2009, the new rules mentioned above presently apply, but there is uncertainty due to a real possibility that Congress will change the law before the end of 2010. Under these circumstances, what should a personal representative of an estate do?

Most importantly, obtain tax advice from a qualified professional tax advisor who is familiar with these changes in the law and who can monitor other possible changes, particularly in 2010. Obtaining professional tax advice concerning the administration of an estate or trust is prudent and sensible in every case, but is particularly important in these uncertain times.

Legislation enacted by the 2006 Virginia General Assembly, House Bill 5018, repeals the Virginia estate tax for the estates of decedents whose date of death occurs on or after July 1, 2007. The estates of decedents whose date of death occurs before July 1, 2007 remain subject to the estate tax provisions. In addition, the repeal of the Virginia estate tax does not affect the filing requirements for decedent and fiduciary income tax, regardless of when the date of death occurs.

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