This year’s temporary expiration of the estate tax may be a boon for heirs of very wealthy decedents, but actually increases the amount of tax paid by many other heirs. In years when the estate tax applies, the basis of assets held by the decedent is adjusted to the fair market value of the assets on the date of death, so that heirs can sell assets at that value without reporting a capital gain. This year, because the estate tax doesn’t apply, this basis adjustment is subject to a dollar limitation (see Property Received from 2010 Decedents for details). It’s possible for heirs of 2010 decedents to be better off under the rules that were in effect in 2009, when the generous exemption amount and unlimited marital deduction may have protected them from paying estate tax while the unlimited basis adjustment would also have protected them from paying tax on capital gains that were built-in at the time of the decedent’s death.
A Treasury official has revealed that the Obama administration is considering a proposal to allow estates of 2010 decedents to elect to be taxed under the 2009 rules. If adopted, this proposal would make it possible to choose the estate tax version that produces the best results for the heirs: eliminating the estate tax altogether but accepting a limited basis adjustment (the 2010 rules), or having the estate tax apply, possibly with zero cost because of the exemption amount and marital deduction, and get a full basis adjustment (the 2009 rules).
Comment: While the Treasury official’s statement doesn’t indicate a final decision has been made, normally deliberations on such a step are not made public unless it appears likely that the proposal will be adopted.
Any more word on this? Has the proposal been adopted?
The proposal was adopted as part of the Tax Relief Act of 2010, enacted at the end of the year — the same law that extended the Bush tax cuts.