FEDERAL ESTATE TAX CREDIT AMOUNTS, MAXIMUM RATES, REPEAL, AND THE NEW INCOME TAX:

1. Estate Tax Credit Amounts and Maximum Rates

Federal Estate & Gift Taxes are imposed on transfers at death or by gift that aggregate more than the following net values:

For deaths in 2002-2003: $1,000,000.00 (Beginning rate 41%; maximum rates 50% in 2002 on taxable estates over $2,500,000.00 and 49% in 2003 on taxable estates over $2,000,000.00)

For deaths in 2004-2005: $1,500,000.00 (Beginning rate 43%; maximum rate 48% in 2004 and 47% in 2005 on taxable estates over $2,000,000.00)

For deaths in 2006-2008: $2,000,000.00 (Beginning rate 45%; maximum rate 46% in 2006 on taxable estates over $2,000,000.00 and 45% in 2007 and 2008 on taxable estates over $1,500,000.

For deaths in 2009: $3,500,000.00 (45% on taxable estates over that amount)

2. The Estate Tax Repeal and the New Income Tax

The estate tax was repealed on January 1, 2010. Absent new legislation, that repeal is temporary and the estate tax will reinstate in 2011, with a credit amount of $1,000,000, a beginning rate of 41%, and a maximum rate of 55%.

Estate tax repeal brings cold comfort. In place of the estate tax, we will be saddled with an income tax, and the estate tax rule of stepped-up basis will be eliminated.  “Stepped up basis” means that if property has been subjected to the estate tax, it is deemed to have a value, for income tax purposes, equal to the greater of (a) fair market value at the date of death (or six months thereafter in some cases), or (b) the decedent's basis.

Contrast the Estate Tax Stepped-Up Basis Rule with the  income tax that will be imposed after repeal of the Estate Tax.  Assume that Dad's estate consists of just an apartment house he had bought for $20,000.00, and it was worth $2,000,000.00 when he dies in 2002, the "basis" at his death would be $2,000,000.00.  If his heirs were to sell the property for $2,000,000.00 on the day after Dad died, they would pay no income tax, because the sales price would not exceed the property's tax basis and there would be no gain. The estate, however, would be liable for an estate tax, computed very roughly as follows:

$2,000,000.00   Gross Estate (ignoring costs of sale and costs of administration)   

(1,000,000.00)  .2002 Applicable Credit Amount

 1,000,000.00    Taxable Estate

   (102,500.00)  .41% of first $250,000.00

   (107,500.00)   43% of next $250,000.00

   (225,000.00)   45% of next $500,000.00

   (435,000.00)  .TOTAL TAXES before Estate Tax Repeal

The same scenario, after repeal of the Estate Tax, would be income-taxed as follows, even if the heirs decided not to sell the property:

 2,000,000.00   Net sales price (ignoring costs of sale)

(1,300,000.00)  Basis Increase to be allowed on property passing to persons other that the decedent's spouse.  The basis of property passing to a spouse who is a United States citizen, can be increased by another $3,000,000.00.

    (20,000.00) Dad's original basis

 1,320,000.00  Total Basis After Estate Tax Repeal

  (680,000.00) Taxable Gain

   102,000.00  Federal Capital Gain Tax @ 15%

     63,240.00  California Income Tax @ 9.3%

   183,240.00 TOTAL TAXES after Estate Tax repeal

If  Dad's death occurs between January 1, 2006 and December 31, 2009, no estate tax would be due, the Basis Increase Rule would apply, and there would be no income tax.

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