The federal law provides estate taxation guideline for wealth passed onto heirs. In late 2010, Congress passed the 2010 Tax Relief Act that provided guidelines on estate taxes and therefore replaced the earlier tax law on estates that was passed in 2001 under the Bush tax cuts and that expired in 2009.
2010 Tax Relief Act
The 2010 Tax Relief Act provided rules for estate taxation and these rules are applicable only in 2011 and 2012. Under this tax law, the transferred estates of people who died in 2011 and 2012 would not be taxed up to a cap of $5 million. Beyond this tax free limit, the wealth is to be taxed to a maximum tax rate of 35%. The tax free limit is a 150% increase from the limit that was in place in the 2001 estate law (the cap was $2 million). Besides the increase in the limit, the law also provided that a surviving spouse inherit the tax free limit of the departed spouse and therefore, in effect, will have an estate tax free limit of $10 million.
No Estate Federal Tax Law for 2010
2010 was a unique year as far as federal estate taxes were concerned. The law for the taxation on estates that was set in 2001 expired in 2009. Regardless of the fact that the expiration time was known since 2001, Congress delayed in passing a replacement law until late 2010. The law that was enacted then was to take effect in 2011 and run through 2012. What this means is that there was no estate tax for 2010 and therefore, heirs of the estate of people who died in 2010 have a windfall gain. However, there is an extra step to this. Apparently, when the law that enacted the new estate taxes was passed late 2010, it reinstated the estate taxes for people who died in 2010, unless the heirs decided to opt out of the estate taxes. This is however, just a technical compliance issue, though people who are ignorant of this fact may assume that they are safe only to discover later that they owe estate taxes because they did not opt out.
Carry-Over Basis
For the heirs who choose to opt out, they in effect, elect to have the estate treated under the carry-over basis as provided for in the former estate law. In other words, the assets in the estate will keep their original purchase price and the valuation basis at the time of inheritance. This will affect the capital gain taxes whenever the assets will be sold. For assets whose market value at the time of inheritance was lower than the purchase price of the assets (in case of loss of value), they will need to use the market value of the assets as opposed to the original purchase price.
