Rich Dad fears Dec 2010

December 22, 2009

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…


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OT but perhaps of interest and/or concern to you RW.

Matt Goldstein does a piece on possible insider trading years ago involving one Steve Cohen (currently with SAC).
Piece is reportedly vetted & OK’d by Reuters lawyers.

Steve Cohen contacts Devin Wenig (big cheese at Reuters) & Matt’s story is killed.

Hmmm… CBS & Big Tobacco come to mind.
(Yeah, I frequent ZH)

Posted by StevenKs | Report as abusive

With respect to “step-up” of the cost basis for inherited assets going away in 2010, . . . does it only go away in cases where the decedent dies in 2010?

What about cases where the decedent died in 2009 or earlier, . . . and the heir inherited the assets at that time, . . . but the heir did not sell the assets until 2010. In this case, when calculating federal taxes, is the cost basis of the assets still stepped up to their market value at the time of death, or does step-up go away for this example too?

Posted by RH | Report as abusive

You lose 100% stepped-up basis only if decedent dies in 2010. Even if decedent dies in 2010, the surviving spouse can step-up basis in $3M of assets, and the basis in up to $1.3M of other assets to anyone can be stepped-up. That is potential $4.3M step-up of assets.

Posted by Stephen Mihaly | Report as abusive