The new tax law provides an option for the executor of an estate of a person who died in 2010 to select between the “repeal” regime of 2010 or the new “taxable” regime as it applies in 2011 and 2012. What exactly does this mean for an estate? The executor has a choice between (i) avoiding all estate taxes, regardless of the size of the estate, but receive only a limited stepped-up basis for capital gains tax purposes; or (ii) take an unlimited stepped up basis, but the decedent’s estate will be subject to estate tax to the extent it exceeds $5 million, excluding amounts passing to a surviving spouse or a charity.
For an estate less than the exemption amount of $5 million, or if the amount of the estate over the exemption passes to a trust for the surviving spouse, the executor will probably opt for the “taxable” regime in order to take advantage of the unlimited step up in basis. Even if the estate is significantly more than $5 million, if the excess amount is passing to the surviving spouse or in trust for the surviving spouse, there will be no estate tax owed due to the marital deduction; the estate tax will be deferred until the death of the surviving spouse.
However, if the surviving spouse’s estate is likely to be much higher than the $5 million new estate tax exemption, it makes sense to avoid the 35% estate tax under the taxable regime, even though it means the estate will only receive a limited stepped up basis. The larger the estate, the greater the incentive to elect for the repeal regime to avoid any estate taxes.
The new 2010 tax act makes significant changes to gift, estate, and generation-skipping transfer taxes which are complex and confusing. We will continue to analyze the 2010 tax act and share with you how it may impact your estate. Thanks for reading our blog. If you have any questions, or need assistance in an estate planning, probate or trust administration matter, contact the Casiano Law Firm.