Which 2010 Estate Tax Election Will You Make?!

Published on: 08:29AM Dec 13, 2010

One of the benefits of the proposed Tax Relief Act may apply to any estate arising in 2010.  Under the proposed rules, the estate can elect to either be:

  • Taxed under the current 2010 rules (no estate tax, but limited basis adjustment to fair market value), or
  • Use the new proposed 2011 rules (possible estate tax, but full step-up to fair market value)

We have done a couple of posts on this previously, but I thought I would give you a pertinent example for a farm couple.

Let's suppose we have a mom and dad farm couple that both pass away in 2010.  Under the current 2010 rules, there is no estate tax, however, the estate can only elect to step up $1.3 million for each estate (there is an extra $3 million that can be allocated for assets going to a spouse, but I am not using that allocation in this example).  The couple bought 1,500 acres of good farmland 50 years ago for $500,000 and this acreage is now worth $10 million dollars split between the two of them when they pass away in 2010.

If the estate elects the current 2010 law, they will owe no estate tax, however, their heirs will only have a basis in the farmland of $3.1 million.  This means when they sell the farmland, the gain of $6.9 million will be taxed by at least 15% costing the heirs easily $1 million.

Now, lets assume the estate elects to use the new 2011 laws (if passed as is), there will still be no estate tax since the combined estate equals the two $5 million exemptions and the farmland will be stepped up to the $10 million fair market value, so no capital gains taxes will be owed on the sale of the farmland (up to $10 million, if sold for more, capital gains taxes will be owed on the excess).

Since the estate can elect either option, for any estate in 2010 in excess of $1.3 million, you will want to carefully review these options to see which makes the most sense.