John A. Scott, P.C.

1000 S. Garfield Ave.
Suite 3
Traverse City, MI 49686
(231) 933-5322

The Monthly Elder Law Planner

January 2010

On The Lighter Side

This column will be dedicated to funny stories, quotes, and poems.  If you have a good one, fax or email it to us at carriehahn@chartermi.net so we can put it in one of our newsletters.

The Complainer

A customer was bothering the waiter in a restaurant. First, he asked that the air conditioning be turned up because he was too hot, then he asked it be turned down cause he was too cold, and so on for about half an hour. Surprisingly, the waiter was very patient, he walked back and forth and never once got angry. So finally, a second customer asked him why he didn't throw out the pest. "Oh, I really don't care or mind," said the waiter with a smile. "We don't even have an air conditioner."

The Businessman 

A young businessman had just started his own firm. He'd rented a beautiful office and had it furnished with antiques. Sitting there, he saw a man come into the outer office.  Wishing to appear busy, the businessman picked up the phone and started to pretend he had a big deal working. He threw huge figures around and made giant commitments. Finally, he hung up and asked the visitor, "Can I help you?" The man said, "Sure. I've come to install the phone!"

The Down Side of 

Estate Tax Repeal

By: John A. Scott

January 1, 2010, will be celebrated in some circles as the date of repeal of the Federal Estate Tax (most enthusiastically presumably by those fortunate enough to have a generous, well endowed parent die in that year). Never mind that it returns 365 days later in an even scarier form.  What may be less well understood is that while the Federal Estate Tax is gone for the year 2010, in its place is the reincarnation of "carryover basis", taking the place of "stepped up basis" on death*.  The "stepped up" basis of property acquired by Junior from dear old Pater on his demise is its fair market value on Pater’s date of death, whether or not there is a Federal Estate Tax to be paid. Thus 1000 shares of Widget Corporation bought by Pater in 1990 for $16.00 per share, and worth $64.00 per share on Pater's date of death in 2009, and sold two years later by Junior for $85.00 per share, will have a long- term capital gain to be reported by Junior of $21.00 per share ($85.00-$64.00).  If dear old Pater shuffles off the mortal coil in 2010, then “carryover basis” will apply and the gain will be $69.00 per share (($85.00-$16.00).           

To ameliorate this odious situation the personal representative of Pater's estate has several basis adjustments at his disposal. The personal representative may increase basis on property by $1,300,000 on devises to anyone.  Note that this is not $1,300,000 worth of assets, but increases in basis amounting to $1,300,000.  The personal representative can select which assets will have their basis increased and by how much but not to more than fair market value on the date of death. The personal representative also can increase the basis on assets passing to the surviving spouse by up to $3,000,000, provided that the property passing to the surviving spouse does so by either an outright gift or as a qualified terminable interest gift (a QTIP Trust).  Use of these basis adjustments by the personal representative might become hotly contested issues in the administration of the estate where the surviving spouse is not the parent of the surviving offspring.  We have drafted some clauses to mitigate the possibility of unfair application of these basis adjustments. 

To calculate carryover basis the personal representative must determine the acquisition cost values for assets in the estate.  Not a difficult matter for stocks held in a brokerage account where cost basis is routinely set forth in monthly statements, but this could be a particularly onerous task in estates with stock still held in certificate form or other assets of considerable value that have been acquired in transactions in which the values on the date of acquisition are not easily determined.  We encourage our clients to keep accurate records of the cost basis of assets in the event that information is needed.

On January 1, 2011, the Federal Estate Tax returns, unfortunately with an exemption amount of $1,000,000, plus change.  A substantial step backwards from the $3,500,000 that the estate of a person dying in 2009 will enjoy.  Hopefully Congress will act to prevent this from happening but we have been hoping that since 2001 and Congressional leaders are firm believers in the credo:  "Why put off until tomorrow what you can put off until the next day."  The realization by many of them that their estates are worth more than $1,000,000 may be a sufficient goad to action. However recent word from the Chief Tax Counsel to the House Ways and Means Committee suggests that Congress may only pass a one year patch to continue the $3,500,000 exemption through 2010. What will happen thereafter is anyone’s guess (yet again). 

John A. Scott, 9 September 2009.

*Carryover basis for assets acquired from a decedent was originally enacted as apart of the 1976 Tax Reform Act.  It proved to be unworkable and was repealed in the Crude Oil Windfall Profit Tax Act of 1980. “Carryover basis” lives on however in the way that basis is calculated for property acquired by a lifetime gift.