There’s been lots of chatter about the “windfall” situation 2010 estates find themselves in this year, with the lapse of the estate tax.

Here’s the problem–this may not be the case. It’s a bit of a technical issue, and one that should be handled in consultation with a tax professional, but this is the long and short of it:

Before this year, heirs valued inherited assets at the fair market value at the time of the decedent’s death. This year, heirs must use the decedent’s basis as their own when computing taxes owed on the sale of these assets.  You can read my previous post that helps explain carryover basis in “every day” terms by clicking here.

The following seven steps can help guide you in this situation:
1. Have assets appraised. In order to determine your estate tax bill and where you want to allocate your $1.3 million carryover basis, you need to know the value of assets in your estate.  That doesn’t mean you are required to have $1.3 million by any means.  Consider that amount as the “coupon” you get to turn in for purposes of carryover basis.

2. Locate purchase records. If you can’t prove the cost of an asset, the IRS will assume a value of zero and you’ll be responsible for capital gains taxes on the entire amount after the adjustment for your “coupon” from #1.

3. Delay selling appreciated assets.
It’s possible that inheritors may be able to escape these carryover rules by delaying the sale of the assets until next year.  It’s not guaranteed.  It all depends on what Congress decides to do.

4. Postpone distributions. Although it seems unlikely at this point, Congress could restore the estate tax retroactively. If the assets have already been distributed, paying the estate taxes will be very difficult.  This is one of the toughest decisions in my mind if you have what could be a taxable estate, since we don’t know what Congress will (or will not) do regarding this issue.

5. Extend paperwork deadlines. Just like an income tax return, you may be able to extend the deadline for the carryover basis reporting paperwork to October 15.

6. Apply the basis allowance fairly. Don’t apply it to particular assets that will benefit one beneficiary more than another.

7. Guard against an executor’s added risks. If beneficiaries disagree with the executor (or trustee as the case may be), the executor (or trustee) could do what they ask (if it doesn’t breach a fiduciary duty), but make sure to get the beneficiaries to sign a document releasing the executor from liability.

Here’s the article I found which goes into greater detail for you:

If you have questions,  let me know or contact your CPA.  For purposes of this post I can’t help but make general statements.  It’s important to note, however, that these decisions are very situation specific, so call us at 616-827-7596 or contact us here to get your questions answered.

Michael Lichterman is an estate planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, and family owned business succession – and he is privileged to do so from a Christian perspective.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.