2010 Connecticut & Federal Tax Law Updates
Connecticut has increased its state estate tax exemption from $2,000,000 to $3,500,000 for deaths occurring on or after January 1, 2010. This change makes the state exemption equal to the federal exemption in 2009. However for 2010, the federal unified exemption credit amount is unlimited--there is no federal estate tax due on any estate for an individual dying in 2010. (See below 26USC 1022.) In 2011, unless Congress acts to make changes in the current law, the federal estate tax exemption equivalent will snap back to equal $1M per person.
This year there is also lost the "step up in basis" for property that is passed at death. There is some belief among probate practioners that Congress may act retroactively to cure where we are left in 2010 by Congressional nonaction in 2009. Stay tuned!
The text of Section 1022 is available online at http://www.law.cornell.edu/uscode/uscode26/usc_sec_26_00001022----000-.html.
Section 1022 does retain the prior law's step-down in basis at the death of the property owner for property that has fallen in value since its acquisition (basis greater than fair market value at death).
However, as stated above, it eliminates the automatic step-up in basis to fair market value that has come to be expected at death. Section 1022 now allows the estate's executor or representative to assign basis value of an estate's assets to be up to fair market value up to a cap of the basis value of the estate assets at $1.3 Million (for U.S. citizens and U.S. resident decedents only). That amount is increased by unused built-in losses and loss carryovers. For decedents who are not US citizens or residents, the allowable basis increase is $60,000, and cannot be increased by unused built-in losses and loss carryovers.
For example, if a single individual's estate at death in 2010, contains appreciated property worth $2.0 Million, and his basis in this property is $200,000, if he is leaving his estate to a child, the child will receive the decedent's property with a basis of $1.5 Million ($200,000 + $1,300,000). When the property is sold, there will be imposed a capital gain tax on the difference between the selling price and $1.5 Million basis. If this property is sold in 2010, (fmv $2.0M -$1.5M=$500k, there will be a $75,000 tax burden ($500,000 x 15%) on the owner of the property who is selling it.
Section 1022 also permits the estate's executor or representative to assign up to an additional $3 Million (not to exceed fair market value) of basis increase to certain property going to or owned by the surviving spouse, regardless of whether the decedent is a US citizen or resident. (However, Section 1022 provides that only property left to a surviving spouse either outright or as "qualified terminal interest property" (QTIP) is eligible for the $3 Million spousal property basis increase. (The definition of QTIP remains the same.)