Our firm is assisting Executors and Trustees with the administration of several estates and revocable trusts of decedents who have died during 2010. Administering these estates has presented numerous challenges.
The first problem is that we do not know whether federal estate taxes will be reinstated retroactively. We are advising the Executors that there are two different sets of laws that could apply, either the law that is currently on the books, or another law that has not yet been written. We are guessing that a retroactive law, if one is enacted, will be similar to the law that existed as of December 31, 2009; however, there are no guarantees.
If there is no federal estate tax, this is great news for most of our estates. However, the price to be paid for having no federal estate taxes is carryover basis. I was not practicing law in the late 1970’s when the prior version of carryover basis was the law, but have been forewarned by various practitioners who were practicing during that time period. Carryover basis is even worse than I had imagined.
We are advising Executors to assume that carryover basis is the law. This means that the Executor needs to ascertain the cost basis of the decedent’s assets unless the total value of the assets is less than $1.3 million, or is less than $4.3 million if the decedent was married and leaves at least $3 million of assets to the spouse or a qualified marital trust. Fortunately, most publicly traded securities held in brokerage accounts now list the cost basis. Determining the cost basis of various other assets such as furniture, artwork, real estate and interests in closely held businesses is not so easy.
One revocable trust has a large holding in a single stock. The stock has performed well since the time of the decedent’s death and the Trustee would like to sell a substantial portion of this position. However, the decedent’s basis in the stock was very low and the beneficiaries do not want the Trustee to sell and incur a large capital gains tax. If carryover basis is repealed and stepped-up basis is restored, everyone will be delighted to sell the stock. By the time the law is settled, the value of the stock may have declined precipitously.
Another revocable trust makes a large charitable bequest that will only occur if federal estate taxes are reinstated retroactively. Neither the charity nor the alternate takers can make plans until the law is settled.
Another estate holds significant real estate holdings. The Executor would prefer not to sell the real estate in the current market. Sales are not necessary if there are no federal estate taxes, but sales will be necessary if federal estate taxes are reinstated retroactively. Waiting until the law is settled may be too late to raise money in time to pay taxes if that becomes necessary.
There are numerous income tax planning issues that must be addressed due to carryover basis and all of its complicated rules. There are also carryover basis strategies that should be considered prior to death when you know that death is imminent but have at least a few days to make changes. I plan to discuss these strategies in a future article.
Because of the Tennessee inheritance tax, Executors still have to obtain date of death values, and perhaps alternate valuation date values, for all assets owned by the decedent. This means that Executors for estates of 2010 decedents have more to do than ever before.