Tax Tips: Estate taxes and body guards?

Over the last several columns, I've been going over tax items currently on Congress's plate to extend. Otherwise automatically on Jan. 1 2011, they change for the worse. This week, I'm ending this series with the Granddaddy of them all (in terms of total possible tax dollars to an individual): Estate Taxes.

Current law (2010): If a person dies, there is zero estate tax. That's the good news. Those who inherit the estate (the heirs), get a very limited step up in basis at death (the bad news). For 2010 only, generally, the income tax basis of property inherited will be carried over from the decedent (the person who died). What that means is that if the decedent purchased a property for $1 and at her death it is now worth $500, the heir's tax basis remains at $1.

There is a small exception to the basis rule (for 2010 only). Executors (the person legally administrating the decedent's estate) can increase the basis of estate property by up to $1.3 million for property passing to any designated heirs, or $3 million in the case of property passing to the surviving spouse. (This will require the executor to file an information return with the IRS to supply basis information to the heirs.) This helps somebody with a nice house and $900,000 or less in other assets, but it doesn't help most successful family-owned businesses, as I will demonstrate.

Current law (Beginning Jan 1, 2011, and beyond unless Congress acts): The top estate tax rate jumps up to 55 percent and an estate becomes taxable if it is larger than $1 million. Heirs get a full step up in basis to fair market value at date of death again.

Let's look at George Steinbrenner's estate. It's estimated that the Yankees franchise is worth at least $1 billion. Let's pretend that George didn't have any other assets. If he died in 2010 (which he actually did), his heirs get the Yankees Franchise and pay zero estate tax. But, if they turn around and sell it, their tax basis is George's (he purchased it for $10 million in the 1970s). Thus, their Capital Gains Tax (maximum of 15 percent) would be almost $150 million. ($1 billion minus $10 million times 15 percent.) Don't even get me started on the Alternative Minimum Tax, which would actually increase this tax - that's another column I already wrote last month.

If George died in 2011, his heirs would pay the IRS almost $550 million in estate tax. If they turned around and sold it for $1 billion, they would have zero Capital Gains Tax because they would get a step up in Tax Basis at George's death to the fair market value of the Yankees. Thus, George actually dying in 2010 saved his heirs about $400 million in tax to "cash out" their inheritance. ($550 million in 2011 verses $150 million in 2010.)

If George were healthy, he might have been advised to hire a body guard so that one of his heirs didn't try to knock him off in 2010. Hmmm, one must have to wonder if he really died of a heart attack, eh?

• Kelly Bullis is a certified public accountant with more than 30 years of experience. Contact him at 882-4459.