When America's first billionaire John D. Rockefeller (pictured at right) died in 1937, his estate paid tax at a 70% rate. In contrast, the estate tax rate on Houston billionaire Dan L. Duncan's estate, unless Congress passes a retroactive Estate Tax, is 0%. Last week the New York Times weighed in concerning Duncan's death in an article entitled "Legacy for One Billionaire: Death, But No Taxes."
The issue that was not addressed, however, was whether or not there was any tax due to the fact that in 2010 the automatic "step-up" in basis for capital gains tax purposes was also repealed.
Mr. Duncan’s worth was estimated by Forbes magazine at $9 billion, making him as the 74th wealthiest in the world. If Mr. Duncan's life had ended three months earlier, his estate would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.
Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.As is typical with New York Times articles, the most interesting analysis is in the "comments" to the article. Both sides of the Estate Tax argument are well represented, and make for good reading. Well, good reading if you like to read about estate and tax policy, at least.
However, do not forget that 2010 was a year in which there was an "estate tax capital gains tax" swap. At least 20 New York Times commentators were unaware that in 2010 the estate tax was repealed, but so was the automatic "step-up" in basis for capital gains tax purposes. In 2009, for example, the law provided that for estates which did not contain retirement plan assets (which are taxed as income to the heirs as such funds were never taxed at all to the decedent) there would be no tax at all for estates up to $7 million in value per couple.
Depending on the composition of the estate, and the state in which the decedent lived, in 2010 a $7 million estate could pay as much as $1 million or so in capital gains when assets are sold.
Capital gains vs. Estate tax is not quite an "apples to apples" comparison, as the taxes are imposed at different rates, and of course at different times (for example, if Duncan's company is not sold by his heirs, capital gains will not be due) but 2010 was definitely not a "totally tax free year" in the case of inherited assets.
Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. He is a very experienced Los Angeles estate planning attorney and is available should you need legal advice regarding your own situation.
You can e-mail Hank Moravec at firstname.lastname@example.org or call him at (626) 793-3210 to request a consultation. The firm website is http://www.moravecslaw.com/