Estate tax issues

By February 14, 2011Uncategorized

Last time, we discussed recent changes to the federal estate tax that personal representatives should be aware of.  Again, although the Arizona Probate Code does not impose an Arizona estate tax, these changes are important to note because, when applicable, Arizona personal representatives must also deal with the federal estate tax.  Under the new estate tax laws, estates valued at more than $5 million are subject to an estate tax of up to 35 percent.  This will bring relief to many estates, considering the estate tax was scheduled to apply to estates valued at over $1 million.

This change in the tax code is relatively straightforward, with one major exception.  Personal representatives of estates where the decedent passed away in 2010 may choose between the old estate tax law and the new estate tax law.  Under the old law, decedents who passed away in 2010 were not subject to any estate tax, but inherited assets were subject to a carryover tax basis.  Under the new law, however, estates valued at over $5 million are subject to estate tax, but inherited assets receive a favorable stepped-up tax basis.

For personal representatives dealing with estates valued at under $5 million, the obvious choice is to apply the new law.  This way, the estate not only avoids the estate tax, but also receives favorable tax basis treatment.  Personal representatives dealing with estates valued at more than $5 million, however, are presented with a more difficult choice.  They must weigh the savings the estate will receive from avoiding the estate tax against the costs that devisees and heirs may later pay in capital gain taxes they incur as a result of the carryover tax basis laws.

So what does this mean for personal representatives?  First off, this discussion only applies to personal representatives handling estates of decedents who passed away in 2010.  And, further, the vast majority of these personal representatives are not handling estates large enough to present a choice of which law to apply.  But, for those personal representatives handling larger estates, it is imperative that they recruit the assistance of an Arizona probate lawyer who fully understands these intricacies in the law.  Failing to make the right decision in this regard could have serious tax repercussions that can easily be avoided with the guidance of a qualified Arizona probate attorney.