Congress has had nine years to clean up the unusual situation of there being no federal estate taxes in 2010, and then a reversion to 2001 rates and exemptions in 2011 and thereafter. Last minute efforts this month to avoid the repeal of the tax in 2010 have failed, and for the first time in many years, there will be no estate taxes (but only for 2010).
It is likely that Congress will revisit the issue in 2010. What shape any resulting action takes is difficult to predict. Republicans may have the early edge to bargain down rates and increase the unified credit, but as the clock ticks towards 2011 with its built-in rate increases and substantial unified credit decrease, bargaining power may shift to the Democrats. Whether Congress will touch the political hot potato of a retroactive re-imposition of the tax is an interesting question.
Unfortunately, the repeal of the estate tax also brings in the abomination of carry-over basis. Presently, if someone dies, the adjusted basis in their property is adjusted to current value. In a carry-over basis regime, such adjustment does not occur, and the heirs receive the same basis the decedent had for calculating gain or loss on a future disposition and for other purposes. How the heirs are supposed to have basis information if the decedent is deceased and was not a good record keeper is anyone’s guess, and one of the reasons why carry-over basis is terrible tax policy from an administrative and compliance perspective.
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