Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, March 25, 2011

Choosing Whether to Pay the Estate Tax or Capital Gains Taxes for 2010 Decedents

Estate Tax The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enables executors of decedents’ estates to choose between paying the estate tax at the 2011 rates or paying no estate tax but giving up a step-up in basis on inherited assets (for decedents who died in 2010). While many people would think that the choice between the two is easily resolved with a quick computation of what would be the cheapest, there are other important factors that need to be taken into consideration.

First is the consideration of certainty. The 35% estate tax is a known amount that is due at a known date. The capital gains route requires the additional questions of when the asset will be sold, how it will be valued at that time, and what the tax rate will be at that time.

Second, it is common today to have blended families, second families, or even third families. When beneficiaries are provided for differently, the executor may be in a bind when one group wants him to choose one scheme while the other wants him to choose another scheme.

Other factors to take into consideration include:

  • Application of state statutes to interpret formula provisions and terminology used in Wills 
  • Whether electing into the no estate tax regime affords an opportunity to reduce or avoid estate tax at the death of the surviving spouse, by avoiding the need to make a QTIP election for a marital trust
  • The size of the separate estate of the surviving spouse
  • Whether the estate assets are subject to depreciation recapture, so that potential tax arising from a lower basis is not just a function of capital gains rates but also ordinary income tax rates

Michael Roberts, Estate Tax Strategies and the New Tax Code: Embracing Occam’s Razor, Financial Planning, Mar. 23, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.


Estate Administration, Estate Tax, New Legislation | Permalink

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