Estate Tax Expiration

THE CONGRESSIONAL tax writing committees have allowed the federal estate tax to expire on January 1, 2010. Senate Democrats have said they will try early this year to pass retroactive legislation to ensure no lapse in the estate tax. If Congress succeeds in reinstating the tax retroactively, court challenges are likely against the Internal Revenue Service (IRS) with opponents alleging that the tax violates the Constitutional ban against ex post facto laws. The Supreme Court, however, ruled in a 1994 case (U.S. v. Carlton) that the ex post facto ban did not apply to tax laws, according to the International Council of Shopping Centers (ICSC).

If the Federal estate tax disappears, it will be replaced by a capital gains tax, paid when heirs sell inherited assets. In 2011, unless Congress acts, the estate tax will return to tax estates above $1 million, or $2 million for couples, at a 55 percent rate. Current law provides a basis tax break for inherited property. Heirs can “step up” the basis of any property they receive to its fair market value on the day that the original owner died. If the estate tax disappears, or is repealed, heirs must carry over the departed’s basis in the property, and this has significant capital gains ramifications for property that has greatly appreciated over the years.