What Happens if the Federal Estate Tax Law Isn't Changed this Year?
There has been much recent discussion about "death" tax reform, and several bills have been introduced in Congress to that effect (as I have blogged about over the last few months), but so far the law as provided in the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRA) is still in effect.
EGTRA put into place the following estate tax "phase-out" schedule, which repeals the estate tax for a grand total of one year, and brings bring a $1 million exemption and 55% rate in 2011:
Top Estate Exemption
Year Tax Rate Amount
2002 50% $1 million
2003 49% $1 million
2004 48% $1.5 million
2005 47% $1.5 million
2006 46% $2 million
2007 45% $2 million
2008 45% $2 million
2009 45% $3.5 million
2010 repealed N/A
2011 55% $1 million
GST Tax: the generation-skipping transfer tax rates and exemptions are the same.
So, what happens in 2010 if the law isn't changed later this year?
Partial Gift Tax Remains
Gifts in excess of a lifetime $1 million exemption would be subject to a gift tax equal to the top individual income tax rate at that time.
Modified Carryover BasisA modified carryover basis rule will immediately come into effect. Under current law, the basis of assets received from a decedent is stepped up to the fair market value as of the date of death. Next year, the basis of assets received from a decedent will carry over from the decedent. Two exceptions will exempt most estates:
$1.3 million of basis can be added to certain assets and, in addition;
$3.0 million of basis can be added to assets transferred to a surviving spouse.
However, not all property is eligible for an increase in basis. Property acquired by a decedent by gift from a non-spouse within three years of death is excluded (to prevent “gifts” of low basis assets in exchange for stepped-up bequests). Income in respect of a decedent property (such as IRAs) is also excluded, along with stock held in a personal holding company or foreign investment company.
Impact of Modified Carryover Basis
Under the new rules, real estate or other assets that remain in a family for generations will require accurate basis records to be kept for generations as well. Without accurate basis records maintained over decades, the IRS will prevail in any dispute over the basis, thus keeping basis low and taxing the assets “artificially” high.
As a practical matter, the estate tax is being replaced with an increased capital gains tax for beneficiaries of estates over $1,300,000.
Assuming that the federal estate tax is repealed as of 1/1/2010, what happens to the North Carolina estate tax? Is it effectively repealed also, notwithstanding the effort to "decouple" from the repeal of the state death tax credit under IRC section 2011?
RESPONSE: As I read the statute, there can be no NC estate tax if there is no federal estate tax.