There has been no estate tax in 2010 , but it will be reinstated Jan. 1 with only a $1 million exemption, which is lower than in previous years, said Augusta lawyer DeWitt R. Dent.
In 2009, the estate tax exemption was $3.5 million, said John Donsbach, an attorney for Donsbach & King LLC in Augusta. The new law will increase taxes on most estates, unless Congress takes action, he said.
"The difficulty right now is nobody knows what the rules are going to be because the taxes apply at death, and they're shifting all the time," said Aubrey Rhodes, of Rhodes Law Firm. "It's a political football right now that's being tossed back and forth between the parties."
When estate taxes are reinstated next year, there will be no taxes for the first $1 million. After that, the tax rate is roughly 50 percent. It's a "very extreme tax," Rhodes said.
Estate taxes are particularly challenging for businesses and farms because the tax will be due even if the inheritor gets property but not cash, he said.
Estate owners should be concerned by carryover, Dent said.
If a parent dies in 2010 and leaves property to children, there will be no federal estate taxes this year. When the children sell the property, however, they will face problems. If the property is valued at $1 million when they receive it from their parents, and it's worth $3 million years later, the problem occurs over whether the children will have to pay taxes on the difference, he said.
Under the old rules, there was a "full step-up in basis" and heirs would pay no capital gains taxes, Donsbach said.
With the new rules, the basis step-up no longer exists and heirs now have to pay capital gains taxes.
This year, if an estate exceeds $1.3 million, the heirs will end up paying capital gains taxes, thus increasing taxes on most estates.
"I would tell anybody who has somebody pass away this year, they need to see a qualified tax adviser," Donsbach said. "It's critically important to allocate the basis on the assets so you can minimize the tax consequences on the estate. It's going to hit estates at a much lower level than it used to."
Taxpayers can protect themselves from estate taxes through planning, whether in a trust or a will, Rhodes said.
"It can include provisions that help protect the estate from taxes. Also, you can do gifting during life in special ways that helps protect from taxes, either outright gifting or gifting using trusts," he said.
The estate tax applied depends on how the person's assets are counted. A husband and wife's assets are counted together. The tax counts the fair market value of a person's assets, including his home, business, real estate, savings, retirement and life insurance, which pushes many people over $1 million, Rhodes said.
With careful planning, the estate tax can be eliminated or reduced. For instance, married couples can take advantage of the fact that each person has a $1 million credit.
With no planning, they will end up with only one credit, but they can increase their credit to $2 million because the tax generally applies after the second death, he said.
"We can do planning with wills or trusts to protect the credit of whoever dies first so we have two credits. We can eliminate estate taxes unless their estate is over $2 million. For most families, that's enough," Rhodes said.
This can achieved by including a clause stating that when the first spouse dies, his or her assets will be left in a trust for the second spouse. The surviving spouse can spend it without it being part of their estate, he said.
"If you don't do it before the first spouse dies, you lose the opportunity," Rhodes said.
If people have been making contributions to generation-skipping trusts, there will be problems this year because there is no exemption to apply to the trust, said Donsbach.