We are finally in the tax year no one thought would really happen. This year we have no “Death Tax”.
Rule 1: If you are the Executor or Administrator for the Estate of someone who dies this year make sure you talk to an experienced CPA or other tax preparer. This is going to be an issue missed by many probate attorneys who do not also work with estate planning or tax issues.
The issues for the beneficiaries on their tax returns are going to be complicated and have to do with something called “tax basis”. The good news is that this year will be the only year probate administrators will need to deal with this issue. The tax rules that existed in 2000 will lock back into place and we will again be able to use the step up in basis rules again.
Even better is that for those of us with a small estate our executor can elect to create a “stepped up” basis of up to $1,300,000.00 of $3000,000.00 if the property passes to a surviving spouse.
Until this year heirs and beneficiaries received a tax basis on inherited property based on the Fair Market Value at the date of death. Frequently called “stepped-up” basis. This is a fairly simple value to obtain and results in very little income tax due when the property is sold by the beneficiaries. This is especially true if the property was sold soon after the death of their parent or spouse.
Now the beneficiaries’ tax basis is the tax basis of the person who died (Decedent). Generally this will be the amount that the Decedent paid for the property plus certain other amounts spent on the property.
More likely than not, most of the Decedents did not keep the records required to establish the tax basis and the beneficiaries will have no idea of where to look for those records. This could create large income tax bills for beneficiaries with an executor who did not hire a good tax preparer or persons with larger estates. On the other hand in a large estate the amount saved on not paying the estate tax more than offsets the additional income tax on gains from the sale of what will probably be long-term capital assets that are taxed at much lower income tax rates.