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The supposed repeal of the federal estate tax is probably the biggest hoax on taxpayers in the past 15 years. Effectively, nothing has been repealed. Estate planning is as important as ever, and all estate plans and gifting programs should be retained. MISCONCEPTION NO. 1: The estate tax has been eliminated. The new law provides that in 2010 the estate tax will disappear for one year. In 2011, if Congress does not vote to eliminate the estate tax, then the old law will be revived. What do you think are the chances in ten years that Congress will vote to do away with a tax that only affects 2% of the population when faced with the baby boomers reaching 65 and Social Security stretched to its limits? MISCONCEPTION NO. 2: Estate tax rates are dropping significantly up until 2011. They drop to 45% by 2010. If you die before 2011 the maximum rate (reached almost immediately) is 45%, only slightly down from the current 55% maximum rate. You can also expect the State of California to weigh in with a new inheritance tax to make up for its loss. MISCONCEPTION NO. 3: The gift tax is repealed. The gift tax is not repealed, not even for one year. Anyone who has established (or is considering establishing) a gifting program should continue with his or her plans. MISCONCEPTION NO. 4: If the estate tax is eliminated, there will be no tax to be paid by the heirs. Under current law, the bases of assets passed by inheritance are increased to current fair market value ("stepped up"). This step up in basis means that heirs pay no income tax on the appreciation of the property prior to inheritance. Under the new law, only the first $1.3 million of assets would receive a stepped up basis. The remainder will be subject to income tax using the original basis of the property. This change will be an accounting nightmare for heirs, particularly if the basis of the asset has fluctuated over several decades.
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