California Estate Planning Blog by Kevin Staker

January 14, 2017

Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them by Kevin Staker

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Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them

The federal estate tax exemption is 5 million, indexed for inflation since 2010. “Portability” allows a surviving spouse to use the unused federal estate tax exemption of their deceased spouse.  The exemption in 2017 is $5,490,000.  Thus, a couple can transfer nearly $11 million to their children or other beneficiaries at their deaths without any federal estate tax.

The basis of appreciated assets is “stepped-up” (or down) to fair market value at death.  This eliminates any built-in capital gain on these assets. This happens even if the estate is not subject to estate tax.  For example, the estate is less than the federal exemption or passes to a surviving spouse.

Even the few taxpayers is estate tax territory should think twice before giving assets to their beneficiaries during their.   Even though such transfers would remove the appreciation in the transferred assets from their estate for estate tax purposes, the basis of these assets given away during life is not stepped-up at their deaths. Thus, the donees are stuck with their likely low income tax basis, and so income tax may be paid if the donee sells the asset.

Therefore, the benefit of the estate tax savings achieved by transferring an asset during a taxpayer’s life will likely be outweighed by  the cost of subsequent capital gains taxes when the donees later sell the asset.

By Kevin Staker

January 13, 2013

It is Official: Exemptions Will Be $5,250,000

The IRS in Revenue Procedure 2013-15 announced the estate and related tax exemptions will be $5,250,000 in 2013. See http://www.irs.gov/pub/irs-drop/rp-13-15.pdf

Thanks to Brian Bergman at MacLean & Ema for passing along to me the citation.

We shall see.

Kevin Staker
Estate Tax News Blog

January 11, 2013

Bloomberg Claims the IRS Has Announced a $5,250,000 Exemption But I Cannot Find Proof

Bloomberg claims the IRS has announced a $5,250,000 exemption for the estate and related taxes.  See http://www.bloomberg.com/news/2013-01-11/irs-increases-exemption-from-estate-tax-to-5-25-million.html

However, I cannot find any proof.  They do not cite any IRS announcement.  The following is the link to where new IRS announcements are listed:  http://apps.irs.gov/app/picklist/list/formsPublications.html;jsessionid=Sr5t6S1uXbmUFGq86OUCcA__?sortColumn=postedDate&indexOfFirstRow=0&value=&criteria=&resultsPerPage=25&isDescending=true

We shall see.

Kevin Staker

Estate Tax News Blog

January 2, 2013

House Passes Estate Tax Act

On a vote of 257 to 167, the House of Representatives passed the American Taxpayer Relief Act which returns the estate tax law to as it was in 2012.  Technically the exemption had gone down to $1 million on January 1st and so this is a tax cut.  However, just from a technical standpoint; the Act is retroactive.

The mainstream news media is stating the exemption has gone to $5 million but that is not correct.  It is $5 million adjusted for inflation since 2010.  I estimate the exemption will be around $5.2 million.  We need to hear the calculation from the IRS.  Its should come in the next few days.

The President has yet to sign the Act.  Hence, we technically still have a $1 million exemption as I write this post.

We shall see.

Kevin Staker

Estate Tax News Blog

January 1, 2013

Senate Passes the Change to the Estate Tax, 89-8; Exemption for 2013 To Be Over $5.2 Million and Rate To Be 40 Percent

It is official. The Senate passed the “American Taxpayer Relief Act of 2012” on a vote of 89-8 early on January 1, 2013.  We will now have an estate tax rate of 40 percent.   The estate tax and related exemptions will now be $5,000,000 adjusted for inflation from 2010.  That number was $5,120,000 for 2012.  The news media erroneously reports the exemption at $5,000,000 now.   The Senate bill technically (and simply) makes permanent the changes made to the estate tax by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

I must admit I am still trying to find out what the inflation adjusted number for 2013 will be.  The IRS it appears has not come out with an official number.  IRS Revenue Procedure 2012-41 announced the inflation adjustments for 2013 but specifically fails to state the number for the estate tax exemption.

See http://www.irs.gov/pub/irs-drop/RP-12-41.pdf

My guess is the estate, gift, and generation-skipping transfer tax exemptions will be increased to $5,270,000.  The number is the $5,120,000 exemptions of 2012 adjusted for 3 percent inflation in 2011 ($5,273,600) rounded down the the nearest $10,000.  It is a wild guess on my part as to the inflation number to be used.  United States inflation was an even 3.0 percent for 2011, and I assume they use the figure for the year two years before the year to be adjusted because you do not know the figure for the prior year until you are already in the year to be adjusted.

The bill is technically House Resolution number 8, a bill passed by the House that the Senate technically gutted and substituted in the language of the their tax act. They had to do it this way because revenue acts technically have to start in the House.

The full text of the bill can be found at http://www.businessinsider.com/breaking-full-text-of-the-157-page-bill-to-avert-the-fiscal-cliff-2013-1 or at http://i2.cdn.turner.com/cnn/2013/images/01/01/american.taxpayer.relief.act.pdf

The bill now goes to the House of Representatives for approval. The Tea Party folk will not be happy. This bill has all sorts of tax pork in it. They especially will not like the increase in income tax rates for higher income folk. However, this is the best they are going to get. And they will have another chance to rein in federal government spending next in the fight over increasing the federal debt limit.

We shall see,

Kevin Staker
Estate Tax News Blog

December 31, 2012

Latest Word: Estate Tax Law to Remain As Is But With 40 percent Top Rate

Exemptions and all else as the law is now, in 2012, but with top rate going to 40 percent. What a coup for the Republicans!. Reported by JULIE PACE and BEN FELLER at Associated Press: See http://www.wvva.com/story/20471309/fiscal-cliff-disputes-remain-as-deadline-nears

On the other hand, CNN reporting no deal as of 1:01 pm eastern.  See http://politicalticker.blogs.cnn.com/2012/12/31/latest-updates-final-fiscal-cliff-scramble/?hpt=hp_t1

We shall see.

Kevin Staker

Estate Tax New Blog

Estate Tax Is One of the “Sticking Points” Preventing Avoidance of “Fiscal Cliff”

Multiple media sources report the estate tax issue is one of the remaining issues preventing avoidance of the Fiscal Cliff. It appears the most important issue, the income level at which the Bush Tax Cuts will not be extended, will be settled at $400,000 for a single person and $500,000 for a couple. That about splits the difference on the positions of the two sides.

The major remaining issues are the Republicans want to extend the present estate tax exemption, $5,120,000, and rate, 35 percent, and the Democrats want $3,500,000 and 45 percent (the 2009 law). On the other hand, the Democrats want to extend long term unemployment benefits, and the Republicans oppose such as a luxury we cannot afford.

Bloomberg reports the estate tax is still a major issue.  See http://www.bloomberg.com/news/2012-12-30/mcconnell-says-he-called-biden-to-try-to-jump-start-talks.html

However, ABC News reports they have already agreed to the Republican position.  See http://abcnews.go.com/Politics/OTUS/fiscal-cliff-biden-mcconnell-close-minute-deal/story?id=18099848#.UOHF1KwzR_c

The Washington Post has a good, concise explanation of what is involved in the estate tax issue.   See http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/30/the-fiscal-cliffs-estate-tax-fight-explained/

Z. Byron Wolf and Sarah Parnass at ABC News are keeping an excellent live update of what is going on.  See http://abcnews.go.com/blogs/politics/2012/12/live-updates-countdown-to-fiscal-cliff/

I predict each side will capitulate and give the other what they want. This is want happened at the end of 2010.

We shall see.

Kevin Staker
Estate Tax News Blog

December 29, 2012

Estate Tax Reportedly Important Part of Fiscal Cliff Negotiations

Several sources report the estate tax is an important part of the Fiscal Cliff negotiations.

Ted Barrett and Greg Botelho, at CNN report the following:

Democrats believe Republicans should make the “first move” — basically by saying what changes should be made to the president’s proposal, which calls for tax rates to stay the same for all annual family income below $250,000. The expectation is that Republicans will try to raise that income threshold to $400,000 and push to keep estate taxes low; Democrats said they might be open to one such scenario, but not both.

See http://www.cnn.com/2012/12/29/politics/fiscal-cliff/index.html?hpt=hp_t1

Lisa Mascaro and Kathleen Hennessey at the L. A. Times report:

One key aim for negotiators is to find an income threshold that could draw enough Republican support for Boehner to win over a majority of his caucus — 120 members — while attracting the remaining Democrats needed for passage. Boehner has resisted bringing a bill to the floor without the support of most House Republicans.

Another point of contention has been the level for estate taxes. Republicans want to keep the current 35% tax rate on estates worth more than $5 million. Many Democrats want a 45% rate on estates worth more than $3.5 million. If Congress does not act, the tax automatically reverts to its 1990s level of 55% on estates worth more than $1 million.

“There are certain things in which you begin losing a lot of real votes quickly, including mine — and fussing with the estate tax is one of them,” said retiring Sen. Jon Kyl of Arizona, the second-ranking Senate Republican.

See http://www.latimes.com/news/nationworld/nation/la-na-fiscal-cliff-20121229,0,478384.story

Manu Raju also reports the leaders of the two parties in the Senate, Reid and McConnell, have the estate tax as one of the issues they will try to resolve.  See http://www.politico.com/story/2012/12/fiscal-cliff-lawmakers-predict-no-deal-out-of-wh-meeting-85565.html

Jared Bernstein at the Huffington Post reports the same at http://www.huffingtonpost.com/jared-bernstein/fiscal-cliff-the-next-few_b_2380737.html

David Welna at NPR reports that Senate Majority Leader, Democrat, Harry Reid would propose a bill to avoid the Fiscal Cliff:

That legislation would extend expiring tax cuts only for household income below $250,000 and include other unspecified provisions that Reid said the president wanted; among them is likely an extension of emergency unemployment benefits that would otherwise expire.

Reid indicated he was willing to see that bill changed in negotiations with McConnell. Republicans want tax cuts extended for income higher than $250,000, they want no increase in the estate tax, and they do not want the top tax rate to go back up near 40 percent.

See http://www.npr.org/blogs/itsallpolitics/2012/12/29/168244940/congressional-leaders-hopeful-of-deal-on-fiscal-cliff-as-deadline-nears

Dan Weil at Newsmax confirms my prior comment that several Democratic senators are in favor of extending the present estate and related exemptions of over $5,000,000. See http://www.newsmax.com/Newsfront/estate-tax-fiscal-cliff/2012/12/28/id/469320

I repeat my prediction.  The Republicans care more about the estate tax than the Democrats.  When this is settled and it will be settled, it is only a matter of time, the President will get an increase in tax rates on some higher income folk and the Republicans will get an extension of the present estate and related tax laws (with maybe only a $1,000,000 gift tax exemption).

A report at Associated Press by David Espo and Jim Kuhnhenn confirms my view:

Democrats said Obama was sticking to his campaign call for increases above $250,000 in annual income, even though in recent negotiations he said he could accept $400,000.

The two sides also confronted a divide over estate taxes.

Obama favors a higher tax than is currently in effect, but one senior Republican, Sen. Jon Kyl of Arizona, said he’s “totally dead set” against it. Speaking of fellow GOP lawmakers, he said they harbor more opposition to an increase in the estate tax than to letting taxes on income and investments rise at upper levels.

See http://bigstory.ap.org/article/white-house-meeting-last-stab-fiscal-deal

Note, Senator Kyl was the driving force the last go around in December 2010 behind our present high estate tax exemption and other provisions of the law favorable to wealthy taxpayers.  He may be retiring but he is still the Senate Republican Whip, a very powerful participant in the negotiations going on in the U.S. Senate as I write this post.  Just watch, he will get almost all he wants.

We shall see.

Kevin Staker

Estate Tax News Blog

December 28, 2012

Update: Movement in Congress Appears to Be In Favor of Extension of Present Estate Tax Law

Extending the present exemptions for the estate and related taxes seems to be the current trend in Congress.  Justin Sink at the Hill reports the following:

Some Republicans have suggested a compromise might be found in allowing Bush-era tax rates to rise only on annual incomes above $400,000. Talk of a “mini-plan” that would include an extension of current tax rates under $400,000 along with an extension of the current estate tax rate swept through the Capitol on Friday.

The article is at http://thehill.com/homenews/news/274799-congrssional-leaders-arrive-at-white-house-for-cliff-talks

On the other hand, it is appearing likely I was wrong in predicting they would pass the Middle Class Tax Cut Act at the last minute.  However, we are not at the last minute yet so

We shall see.

Kevin Staker

Estate Tax News Blog

 

 

Finally, Someone is Paying Attention to the Estate Tax Amid the Fiscal Cliff

Andrew Bolton at the Hill has an excellent article on the status of the negotiations among the Republicans and Democrats in Congress along with President Obama. He actually views the estate tax as a key in the negotiations. See http://thehill.com/homenews/news/274721-estate-tax-could-be-key-to-fiscal-cliff-deal

Bolton reports that it appears the Republicans might accept the cut off for extension of the Bush income tax cuts at $500,000 if the present (as of 2012) law on the estate tax is continued.  The current law is $5,120,000 exemptions (estate, gift and GS tax) with a 35 percent top rate.  He on the other hand reports the liberal Democrats would squawk about continuing such a generous level.   However, he also points out many farm state Democratic lawmakers would favor high exemptions.

We shall see.
Kevin Staker
Estate Tax News Blog

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