No Estate Tax in 2010:  What Does this Mean to Your Donors/Clients?
Congress has substituted another method of taxation that will collect more taxes from many of our donors/clients and families than the estate tax. Additionally, as has been reported in the local and national media, including the Wall Street Journal and New York Times, these changes will, for some, greatly alter the planned for and anticipated distributions among family members and heirs.

These changes impact people of all levels of wealth, and the new tax will impact an estimated ten times more Americans than the estate tax.

A New Tax Replaces the Estate Tax
To pay for this one-year vacation from the estate tax, Congress replaced the estate tax with an increased income tax. Before 2010, any assets that pass to someone when you die would be valued at fair market value at the date of death. Thus after death, when a surviving spouse or heirs sold any assets (like securities or a home) that had increased in value, they would not have to pay income tax on any of that growth that occurred during your life. (This is referred to as a "step-up in basis.") For many heirs this means huge income tax savings, oftentimes tens of thousands of dollars or more.

But in 2010 property that passes at death does not automatically receive this step-up in basis. Instead, each individual has a limited amount of property that can be "stepped-up" in value at the time of death. Property that does not receive this step-up value will be subject to tax on the total increase in value from the date you first acquired the property. This means that the property could be exposed to tens of thousands of dollars of income tax liability for your heirs!

Not surprisingly, these rules are convoluted and in many cases very different from the old law. In fact, Congress attempted to institute a similar tax structure in the 1980s and it was repealed retroactively, because it was too difficult to administer. Because of past experience as well as the anticipated difficulties in calculating such a tax, the common belief was that Congress would change the law before January 1, 2010. But it didn't.

What Should We Expect from Congress Now?
No one knows what Congress will do next; everyone assumed that Congress would act before December 31, 2009. But Congress was preoccupied by the health-care debate then, and it is very possible that Congress will continue to focus on health care and other pressing matters up to the time of the mid-term elections in early November. In fact, some cynics have suggested that Congress will not act until the end of 2010 or later because Congressional members up for re-election will make repeal of the death tax a campaign issue. These same cynics argue that both Republicans and Democrats will blame the other for this mess, with neither wanting to fix it. If that happens, we may not see anything from Congress regarding the estate tax until 2011, at the earliest.

Used with permission of the Planned Giving Design Center.