WHAT YOU NEED TO KNOW ABOUT CARRYOVER BASIS AND THE ESTATE TAX REPEAL
Let’s begin with basis. Prior to January 1, 2010, when folks died, all of their assets took on their date-of-death value for purposes of income tax capital gains and losses. That is called step-up in basis. Consider the example of someone who purchased shares of XYZ Corp in l980 for $25 per share, and died in 2009 when the stock was worth $100 per share. If the estate sold the stock for $105 per share, the gain would be $5 per share ($105 less $100), rather than $80 a share ($105 minus $25). Since January 1, 2010, when the same stock is sold for the same amount, the gain will be calculated at $80 per share. Thus, for income tax purposes, the date-of-death value is now irrelevant. The cost basis is relevant; that is carryover basis. There is a method by which your estate can acquire the step-up in basis for a significant amount of assets. However, you must have an accurate record of your cost basis as a starting point to figure it out.
As the result of a law enacted nine years ago, there is no estate tax this year. However, the same law provides that the estate tax will come back next year with a $1 million exemption. If you and your spouse have significantly more than $1 million in assets and your present will provides for distribution by way of “marital”, “residual” or “credit shelter shares” language, you should consult your attorney to make sure your will takes into account the current status of the estate tax, particularly as the tax will be returning on January 1, 2011 with the lower exemption amount.
To stir the pot even more, Congress may well make further changes that affect estate planning. The changes will probably affect both the exemption amount and the carryover basis. In short, the laws are quickly changing so you should consult your attorney to make sure your will and overall estate planning are up to date.