Even though I am not a baseball fan, I know who George Steinbrenner was, as he was someone a bit larger than life. As you might have guessed from the title, this post is not an homage to Mr. Steinbrenner, but a discussion of the current estate tax rules.
There was a time (seems like yesterday) when the estate tax exclusion was one million dollars, but that was back in 2002 and 2003, and the number was even lower in years prior. But along with the rising exemption came one strange anomaly in the code, a year with an unlimited exemption, no tax on the estate of anyone fortunate enough to die this year. This doesn’t mean his heirs get away with no taxes ever due. Along with the estate tax, the rule allowing a stepped up basis went away as well.
I know, this is a bit technical, so let me take a step back. To keep the numbers simple, if one died in 2002, and left, say $4,000,000 to his non-spouse heirs, the first $1M is tax free, and then the remaining $3M is subject to an increasing scale up to a 50% rate. So the heir would collect about $2.7M and their basis would be the value at the time of the decedent’s passing (or 6 months later whichever is higher). Under these rules, the decedent’s cost makes no difference. The $4M could have been stock purchased for $10,000 (Don’t we all wish?) or cash from having sold something else and just paid the taxes.
With the 2010 rules, however, the estate gets only a $1.3M step up. So in our example, it makes a big difference whether that $4M is cash or if it’s stock that cost the decedent $10,000. Old rules allowed an unlimited spousal inheritance, new rules give Mrs. Steinbrenner an additional $3M step up. If the number I read are accurate, the Yankees were bought for $10M and the estate is worth $1.1B.
If the family sells their stake, capital gain taxes are due at the prevailing rates, this year, 15%, but expected to rise in 2011. Eventually, Uncle Sam will see some of his money.
So far, I’ve made no judgment, just offered some facts. I don’t know if there’s any structure that will be agreeable to all. There are those who feel the money has already been taxed along the way and the estate tax is a form of “double taxation.” Other feel that there’s too much money concentrated among too few people and somehow the estate tax will help to “level the field.” Objectively speaking, if that’s possible, I think the current rules help avoid the former concern as only gains not already taxed will be taxed eventually and only when the assets are sold. The risk that the “family farm” will have to be sold to pay taxes when gramps dies is gone.
Personally, I can live with whatever structure there is, my only objection is these erratic changes over the years. You see, each set of rules requires its own planning. A fixed exemption of say, $1M, would point toward setting up insurance trusts to cover the tax on the overage. Note, this isn’t tax avoidance, it simply means if I know my estate will have a tax bill of $500K, I can choose to pay for some life insurance to pay that bill, and leave the full amount to my heirs. It’s the changing rules that cause more confusion and anxiety than anything. I’d bet not one in ten people you meet today can tell you what the rules are for those leaving a large inheritance this year. No, not one.
Even now, there’s talk of our congressfolk ‘fixing’ this year’s rules, and making it retroactive to January. We’ll see. We’ll also see what they do regarding the 2011 return to a $1M exemption.
Any thoughts on the Estate Tax? Fair? Not Fair? Let me know what you think or if you have any questions. By the way, my friends at the IRS have a nice little article titled The Estate Tax: Ninety Years and Counting which you can download.