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AICPA Tax Basis Issues
By Children’s Home Society of Florida Foundation
At a July 27, 2010 conference sponsored by the American Institute of Certified Public Accountants, Treasury Representative Catherine Hughes discussed the basis issues that are arising concerning 2010 decedents.
2010 Estate Tax Repeal
While the estate tax is repealed during 2010, under Internal Revenue Code Sec. 1022 there are new and complex rules on basis adjustments. For large estates, a majority of the assets will be transferred with a “flow through” of the basis. That is, the heirs will be able to use the basis of the decedent in any future sales for the purpose of reporting capital gain. Because many decedents have few or no records of the basis, it is quite possible that these heirs will pay capital gains tax on the full value of future sales.
Allowances for Basis “Step-Up”
However, there are allowances for a basis “step-up” of $1.3 million. In addition, for a surviving spouse, the basis step-up can be $3 million. The step-up in basis cannot be greater than the fair market value of the applicable property. Determining how to allocate the adjusted basis step-up in an estate has caused great concern among estate planning attorneys and CPAs. Treasurer Representative Hughes stated, “I anticipate there will be a lot of mistakes where there isn’t an affirmative allocation” of basis. Treasury is studying the situation and may issue guidance with recommended default allocation rules.
Assessment
While Congress continues to debate estate tax law and, therefore, has not made any decision on a potential retroactive estate tax, the nonpartisan Tax Policy Center this week released an estimate of the potential number of 2011 taxable estates. If a $1 million exemption is applicable in 2011, there will be an estimated 43,500 estates subject to tax. If the 2009 exemption amount of $3.5 million per decedent is applicable next year, the number of taxable estates is reduced to $650,000.
Editor’s Note: The discussion in Washington on the practical aspects of allocating the basis step-up now suggests that there may not be a mandatory retroactive estate tax law. With the pending election, it now seems very likely that Congress will not act on the estate tax before December. The Senate continues to have great difficulty developing a plan acceptable to 60 Senators and to the House of Representatives. However, Senators now recognize that a $1 million exemption and tax on 43,500 estates will impact a large number of middle-class children and other beneficiaries. Therefore, it seems quite likely that a compromise should be passed in December. However, as the AICPA basis adjustment discussion suggests, this compromise is now less likely to mandate an extension of the 2009 exemption for 2010. As a result, attorneys and CPAs will need to address the very complex and uncertain basis adjustment problems for 2010 estates.
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Filed under: Accounting, Estate Planning, Taxation | Tagged: accountants, AICPA, capital gains, Catherine Hughes, CPA, estate tax, estate tax basis, Internal Revenue Code Sec., IRS, step up basis, Tax Policy Center this |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
It is far from certain that Congress will act to prevent the scheduled reversion to a $1 million estate tax exemption in 2011. This is one opportunity for lawmakers to raise taxes significantly without a single vote. I’m sure some of our representatives are looking forward to the opportunity!
Brian J. Knabe MD CMP™
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Estate Tax Compromise?
As election day approaches there are discussions underway in both parties about potential compromise options for the estate tax.
Democratic strategists note that if there is no action on estate tax, the exemption reverts to $1 million on January 1, 2011. At that time, the estate tax rate would also increase to 55%. Some members of the Democratic caucus support reducing the exemption and increasing the tax so that decedents with larger estates would pay a higher tax.
In order to pass a new provision on estate taxes, the Senate normally requires 60 votes. If the provision is opposed by President Obama and subject to a veto, then 67 votes would be necessary to override the veto. As a result, a compromise solution that can be supported by 60 or even 67 senators will be needed.
Republican Senators have previously proposed a complete repeal. However, after the extensive negotiations of the past several years, Sen. Jon Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) developed an estate tax compromise.
Under their plan, the exemption would be $5 million and the estate tax would be reduced from the 2009 level of 45% to 35%. At one point during the past year, Sen. Kyl and Senate Finance Chair Max Baucus (D-MT) were close to an agreement that would gradually change the estate tax law. The exemption would start at $3.5 million and increase to $5 million over 10 years. The estate tax would initially be 45% and then be reduced to 35% over the same time period.
There are several potential compromises that may be considered. Because Republican Members do not want to see a $1 million exemption and Democratic members prefer a level of estate tax exemption similar to the $3.5 million number of 2009, there may be some options for a compromise. It is possible that the rate could be set at 40% or midway between the 35% and 45% target numbers. The top rate may also be linked to the top income tax rate. That is 35% at present, but may be increased at some future time to 39.6%.
Another potential compromise is an extension of the current top income and capital gains taxes together with a compromise on estate taxes. For example, Republican Senators may accept a one-year extension of the top 35% income tax rate and the top 15% capital gains rate, if combined with a compromise on estate taxes. The estate tax provision could be an exemption of $3.5 million with a top rate of 45%. Part of the compromise could include some adjustment or indexing of the exemption and the estate tax rate.
The number of taxable estates for the past four years is listed in the following table released by the Department of Treasury.
Taxable Estates
Year Estates % Estates
2006 22,798 – 0.9%
2007 17,416 – 0.7%
2008 17,172 – 0.7%
2009 14,713 – 0.6%
Source: Children’s Home Society of Florida Foundation
Charlie
Editor’s Note: Your editor and this organization take no position with respect to the many financial and tax options that are available to Congress. This information is offered as a public service to our readers.
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Ten Trouble Spots for Estate Planners
Dr. Knabe and this post make some good points.
As a financial advisor myself, I know that estate planning by non-attorneys can be both lucrative and potentially troublesome. So, try to avoid these 10 often-made mistakes, especially when working with medical professionals or other HNW individuals:
1. Over-qualifying for the marital deduction by failing to use a bypass trust.
2. Give the surviving spouse unlimited access to a bypass trust rather than an ascertainable standard.
3. Not coordinating the titling of probate and non-probate assets.
4. Not giving the surviving spouse an annual income QTIP interest, thereby losing the marital deduction at the first death.
5. Not reviewing boilerplate language used by attorneys that may not apply to the particular client situation.
6. Not transferring ownership of life insurance to irrevocable trusts.
7. Not converting gifts of a future interest to a present interest.
8. Not funding testamentary trusts after the client’s death.
9. Not ensuring that donors don’t retain ownership interests in assets gifted.
10. Not using a generation-skipping trust where children are already wealthy.
Dr. David Edward Marcinko; MBA CMP™
http://www.CertifiedMedicalPlanner.org
[Publisher-in-Chief]
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On the Estate Tax
As Congress is in need of more revenue to support the U.S. government spending, the current Congress at the Obama administration will continue to look for creative means to raise revenue. President Obama’s current budget proposal also give Congress a road map to implement legislation that will result in billions of dollars in new revenue but will only affect a small number of taxpayers.
Estate Tax may be still in flux now, it is important to keep current on the Obama administration’s revenue driven proposals and the ongoing overhauling of the mammoth four-million word IRS code in order to stay abreast of the new changes that will affect the estate tax planning.
Ken Yeung MBA CMP™ candidate
http://www.CertifiedMedicalPlanner.org
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