One consequence of Congressional inaction in addition to there being no estate tax as of January 1, 2010, has to do with the tax basis of inherited assets (other than IRAs, annuities, pension type benefits and other “income in respect of decedent” assets).
In the past when someone died and you inherited their assets such as stocks or real estate, you took as your tax cost basis for taxable gains purposes the fair market value of the assets as of the date of death of the decedent.
This means that when you sold the asset you basically subtracted the basis from the sales price to arrive at your taxable gain on the sale. Usually, with “ever increasing values”, the date of death value was significantly higher than the decedent’s cost basis, if the decedent owned the asset for a long period of time. This meant that by inheriting the asset and getting a “stepped-up” basis, your taxable gain on the subsequent sale was often less that if it had been sold by the decedent.
As of January 1, 2010, generally, you take the same basis as the decedent had which is called the carryover basis. In theory, if a decedent held an asset for a long period of time, his or her basis would normally be less than the date of death fair market value, which meant that the taxable gain on the subsequent sale and resulting income tax would usually be higher with a carryover basis. However, with the stock market and real estate market over the last 10 years or so, this may not be the case.
Additionally, there are special rules as of January 1, 2010 providing for a step-up in basis of $1,300,000 in assets and an additional $3,000,000 for marital deduction assets. What this means is that for most decedents the new rule may not have a significant impact over the old rules, but it can and will require additional analysis.
So far almost all tax practitioners have ignored the problem on the theory that it would never actually come into being, but it is here. However, although it is currently the law, most practitioners and commentators believe that Congress will retroactively reinstate the law as it was in 2009 or something similar and go back to stepped-up basis.
What Congress will actually do, is anybody’s guess these days. However, we do want you to be aware of the potential issues and possible need to thoroughly evaluate the sale of significant inherited assets prior to sale. Keep in mind that similar considerations apply to selling assets while you are alive that might otherwise be inherited by family members upon your death.
Lastly, please keep in mind that there may be other adjustments that may need to be made that are not discussed here. This is not an exhaustive analysis and you should consult with your CPA, if you have any questions.