Even With Estate Tax Repeal, Taxation Would Not End

What may surprise many of your clients is that permanent repeal of the estate tax would not necessarily mean the end of taxation. Those with significant low-basis assets or business interests could very well wind up with a more difficult tax situation–and an unpredictable one as well.

In 2010, the current law provides that anyone who inherits property may also potentially incur a large capital gains tax liability that did not previously exist.

When the estate tax is repealed in 2010, a modified carry-over basis rule immediately goes into effect and death becomes an income tax problem, rather than an estate tax problem. The basis of assets received from a decedent will carry over from the decedent, rather than be stepped up to fair market value at the date-of-death or alternate valuation date.

Based on history, the estate tax debate will continue long after the current administration leaves office. President Bush, a leading proponent of estate tax repeal, will not be in office in 2010 when the estate tax is repealed for one year. The electoral process will bring us two presidential elections (2004 and 2008) and three congressional elections (2004, 2006 and 2008) before then. As we all know, controlling parties, ideologies and priorities of elected officials can change at the drop of a hat.