Rich Dad fears Dec 2010
The tax code has a particularly odd quirk next year. The estate tax, which has decreased steadily from 50% to 45 % over the past few years, will drop to zero in 2010. To get the repeal passed, however, Bush 43 agreed to a sunset provision that brings the tax right back in 2011.
Heirs face 45% tax on estates over $3.5 million today. On January 1, the amount goes to 0%. But on January 1, 2011, the tax ratchets back to 55% on amounts over $1 million.
If Congress does nothing, I suspect we could see a spike in millionaire patricides this time next year.
Estates won’t be free of all tax next year. They’ll face much bigger capital gains taxes than they do today.
Under current law there’s something called “step-up.” You may have to pay 45% on the amount you inherit over $3.5 million, but the cost basis is “stepped up” to today’s prices. Step-up will go away for the very largest estates.
This will cause lots of headaches.
If Grandpa bought a bunch of shares of IBM back in 1955 and held them all these years, the cost basis is probably close to $0. If he sold the stock, he’d face a cap gain liability against pretty much the whole amount. But when inherited, the cost basis gets “stepped up” to the current price, wiping out any embedded cap gains liability.
Heirs may not face estate tax next year, but they will inherit shares and property at their original cost basis. So when they sell, they’ll have a large cap gains liability. Therein lies another big problem…
Imagine how difficult it is to determine, for example, the cost basis on shares of AT&T that were acquired decades ago? Besides factoring in dividend payments, what about divestitures and acquisitions that have happened since then? Today’s AT&T is really SBC, which was once AT&T. And what about all the spin-offs the bells did over time? Verizon punted its yellow-pages business as Idearc, for instance. Lucent and Avaya were also spun off from the original Ma Bell. How are those factored in?
It won’t be easy to figure the capital gains liability on estates next year. Accountants and tax lawyers will be running up the billable hours.
Meanwhile, Rich Dad better watch his back…