Estate Tax’s Unclear Fate Challenges Heirs

The longer the tax system is in flux, the greater the financial complications for people who lose a loved one this year. In fact, various uncertainties could paralyze the resolution of financial affairs after a death.

If Congress restores the estate tax retroactively, it could apply to the estates of people who died this year. So heirs of estates that would be subject to the tax need to set aside money for it or keep open options that could minimize the bite. The amount that is tax-exempt is likely to be at least $3.5 million (the 2009 level), and a spouse who is a United States citizen may inherit any amount tax-free.

Meanwhile, other income tax issues arise. Heirs now must use the original price paid for an asset when computing the income taxes they will owe if they sell it. Previously, they could use the value upon the owner’s death. Each estate is permitted to exempt $1.3 million of gains from this carry-over basis rule. An additional $3 million exemption applies to assets inherited from a spouse. So before selling anything, it is necessary to determine which of these two exemptions will apply to any gain. All this can delay distributions to relatives or to trusts that benefit them. “It’s a sad situation that the government lets us twist in the wind while people have to make decisions,” said Carol A. Harrington, a lawyer with McDermott, Will & Emery in Chicago.