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Newsletter - Winter 2007
The Art of Inheriting Property
Michael Novak, Partner, Tax & Business Services |
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If President Bush gets his way, the estate tax will be repealed in full or will only impact the mega-wealthy. Steps towards repeal began in 2001 with a multi-year program to gradually reduce the maximum estate tax rate. For 2007, the estate rate is still high, (45 percent); however, with some basic planning, a married couple with a net worth of $4 million or less can avoid the estate tax. An unmarried person will generally escape the estate tax if their net worth is less than $2 million.
The bottom line is that fewer Americans are going to be subject to estate tax. And with the IRS no longer in the picture, many beneficiaries are making quick work of estate administration in order to get their inheritance. The short period of administration, often coupled with little or no legal or financial advice, is resulting in missed opportunities and a potential increase in income tax when the inherited property is sold.
For example, a wealthy relative dies and you inherit a portfolio of blue-chip stocks. The inheritance of the portfolio is tax-free; however, what happens when you go to sell the stock in the future? What basis should you use? Are you eligible for favorable long-term capital gains treatment? If there are multiple beneficiaries, how do you determine who gets what assets? What about funding of trusts created in the estate documents? In order to address these issues, the executor (or trustee) needs to compile a complete list of the estate assets and liabilities at the time of death. The executor also needs to track the income earned and expenses incurred by the estate during the period of administration.
Once these items are compiled, a report can be prepared to detail how the assets are to be distributed in accordance with the last will or trust and what income tax basis the property will receive for future sale. The report also serves as support that the net worth of the individual at the time of their passing was not subject to estate tax.
Another benefit of formally administering the estate is that it could potentially limit the exposure of the executor or trustee to a lawsuit. Lawsuits are very common when an heir feels they were short changed.
If you are involved in the administration of a non-taxable estate and would like to dot the I's and cross the T's, we are here to assist you.
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