Choosing Between the 2010 and 2011 Tax Systems

In December of last year, Congress allowed deceased taxpayers’ estates to choose either the 2010 or 2011 tax systems if the decedent died in 2010. The choice of system usually depends on the size of the estate and the amount of capital gains on assets it contains. Below is a brief breakdown of the differences between the two systems :

2010 System

• No imposition of estate tax
• The cost basis of assets carries over to heirs
• Generally more beneficial for larger estates

2011 System

• Each individual receives a $5 million exemption and a 35% top tax rate
• All estate assets have a cost basis that is marked up to the value at the time of death
• Generally more beneficial for estates with fewer assets

Additionally, the Wall Street Journal gave the following example to help distinguish between the 2010 and 2011 systems:

John died in 2010 owning stocks, land and real estate that he acquired for $3 million, but which was worth $6 million at his death. Under the 2010 rules no estate tax is due, but John’s heirs will owe capital-gains tax measured from his original purchase price when they sell.

Under 2011 rules, however, John’s estate owes estate tax on $1 million. But his heirs would receive assets with cost basis marked up to the value as of death, lowering future capital-gains taxes.

Arden Dale, A Tough Call for Heirs, The Wall Street Journal, May 21, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.