I am currently in a financial investment conference in Chicago for a couple of days and during one of the sessions, the current estate tax situation was discussed. There appears to be at least 6 billionaires that have died this year and under the current law, they will owe federal estate taxes, however, in most cases, they will owe state estate taxes. Now, this appears to be a good deal, however, there is an income tax cost to not have an estate tax.
This cost relates to there being no step up in basis of the assets that are inherited by the heirs. They can elect to step up $1.3 million in assets or an extra $3 million going to a surviving spouse. Lets see how this might affect a farmer with a decent size estate. Lets assume that a farmer dies with land valued at $10 million and equipment valued at $2 million. Assume there is no other assets and the basis in these assets is only $1 million.
There will be no federal estate tax due, however, most likely about $1 million of state estate will be due. Now lets assume the heirs elect to step up the equipment by $1.3 million and then they sell the assets in 2011. The capital gains rate for the land including state income taxes will be about 30% so, they will owe about $2.7 million of federal and state income taxes. On the equipment, there will be a gain of $700 thousand and assumption top bracket of about 50% for federal and state taxes will result in total taxes on this gain of about $350 thousand.
Therefore, in total, the estate and heirs have paid estate taxes of $1 million and income taxes of about $3 million for total taxes of $4 million. Under the law in effect for 2009, there would have been estate taxes of about $4.5 million and no income taxes.
So you can see that even there is no federal estate tax for this year, a farmer who passes away with certain tax facts can almost pay the same amount in state estate and related income taxes.
Please make sure to review your situation with your tax advisor.
Also, these laws are most likely to change during this year or next and we will keep you posted.