The federal estate tax ended, effective for estates of decedents begriming January 1, 2010. Assets that are transferred at a person's death will now be taxed using the concepts of "carryover basis" and "basis adjustment." The new tax concept is outlined in 26 USC §1022, called "Treatment of property acquired from a decedent dying after December 31, 2009." Two levels of "basis adjustments" will save most people from ever paying taxes on the sale of inherited assets:

• §1022(b): a $1.3 million aggregate basis increase for the assets transferred upon death by an individual person. This $1.3-million step-up in basis will eliminate any capital gains taxation for most estates.
• §1022(c): an additional $3 million spousal property basis increase for property that is transferred upon death to a surviving spouse.

The Hill reports that Republican and Democrat party members of the Committee have ceased negotiations on reviving the estate tax. Republican Senator Jon Kyle of Arizona stated that negotiations broke down last Tuesday, May 18, 2010. It is not known if Congress could make a revived estate tax retroactively effective to January 1. Generally, when a law is enacted, it becomes effective on the date of passage. However, Congress would have to make an exception to this, in order to avoid a complete repeal of the estate tax in 2010. The US Senate will probably try to include a provision making it retroactive to Jan. 1, 2010. TaxProfBlog: Courts will upholds the constitutionality of retroactive estate tax if (1) Congress has a rational legislative purpose that is not "arbitrary" and (2) the period of retroactivity is not excessive more >>

Under the new tax laws that took effect January 1, 2010, an the administrator of an estate will also be able to use the Principal Residence Exclusion, to shelter any gain on the sale of a decedent's home. This will open up new opportunities for planning, and more flexibility for planning transactions with real estate brokers and real estate professionals. An amendment to §121(d) extends the principal residence exclusion to a home sold by:
(A) the estate of a decedent
(B) any individual who acquired such property from the decedent (within the meaning of section 1022), and
(C) a trust which, immediately before the death of the decedent, was a qualified revocable trust. The exclusion will be "determined by taking into account the ownership and use by the decedent." See my article on the principal residence exclusion.

Here's a chart that summarizes the exclusion amounts that existed through December 31, 2009, and the effects of the 2010 changes in estate tax law, which may or may not be repealed by Congress:
$ Value of Estate on Date of Death	Federal Estate Tax as of 2009	Federal Tax Rules That Take Effect 2010	Resident: Estate Tax ?	Resident: Estate Tax ?
Assets in my estate are worth less than $1 million.	No Federal Estate Tax. There is an exclusion up to $3.5 million	All your assets would be covered by the $1 million basis adjustment	No Mass Estate tax (unless you gave away assets during your lifetime that, when added to the value of your estate, total to over $1 million).	No Connecticut Estate Tax. (unless you gave away assets during your lifetime that, when added to the value of your estate, total to over $2 million).
I am a single individual. Assets in my estate are worth more than $1 million and less than $3.5 million.	No Federal Estate Tax.	Did your assets grow in value during your lifetime? If there has been a capital gain, your heirs may have to pay a tax. You need planning.	You need Massachusetts estate tax planning.	You need Connecticut Estate Tax planning if your assets + value of taxable gifts during lifetime are more than $2 million. Read new rules on gift tax reporting for 2010
I am married. Assets in my estate are worth more than $1 million and less than $3.5.	Still No Federal Estate Tax. The 2009 exclusion amount covers up to $3.5 million.	You can get a basis adjustment of up to $3.5 million for assets left to your spouse + your $1 mil basis adjustment + a step up in basis on your principal residence. You need planning.	You need Massachusetts estate tax planning. Without planning your spouse's exemption amount could be wasted.	You need Connecticut estate tax planning if assets + value of taxable gifts during lifetime are more than $2 million. Without planning your spouse's exemption amount could be wasted.
Assets in my estate are worth more than $3.5 million.	There would be a Federal Estate Tax. You need planning.	You need planning to determine whether all of your capital gains will be covered by the basis adjustment. By allocated your gains the tax hit can be managed.	You need Massachusetts estate tax planning, coordinated with Federal tax planning.	You need Connecticut estate tax planning, coordinated with Federal tax planning.

This is only a general overview to help you determine your need for estate tax planning. You cannot rely on the chart for the specific circumstances of your estate. Consult your accountant, and an estate planning attorney, for specific advice on your estate.

Q. If the Estate Tax is not resurrected and made retroactive to January 1, 2010, how will the carry over basis tax be assessed and reported?
Answer: The allocation of the aggregate basis increase will be made by the executor on each asset, and reported on a "Basis return." All assets of the decedent (whether or not they are part of an estate processed through Probate Court) will be part of the calculation. The report is required if all property acquired from the decedent exceeds the $1.3 million aggregate adjustment. §6018. The $1.3 million basis adjustment will be increased by any unused capital losses, net operating losses and other "built-in" losses of the decedent. But the Wall Street Journal predicts this "wiggle room" will require " multigenerational record-keeping nightmares on assets ranging from real estate to stocks to family heirlooms. Heirs would have to scramble to find out what things cost decades before when preparing tax returns." more >>>

Q. What assets would be eligible for the basis adjustments?
Answer:Property owned by the decedent at time of his or her death. §1022(d)(1)(A)

Q. How wIll Jointly held property be taxed?
Answer: The decedent shall be treated as the owner to the extent of the value of a fractional part to be determined by dividing:
the value of the property by the number of joint tenants who have right of survivorship.§1022(d)(1)(B) (i)(III)

Q. What About Revocable Trusts?
Answer: The decedent shall be treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in section 645 (b)(1)). See §1022(d)(1)(B)(ii)

Q. Will Recently Gifted Assets be Part of the Estate?
Answer: No. The basis increase does not apply to property acquired by the decedent by gift or by inter vivos transfer for less than adequate and full consideration in money or money’s worth during the 3-year period ending on the date of the decedent’s death. §1022(d)(1)(C)(i). But there is an Important Exception for Married Couples! Subsection (i) does not apply, unless, during the 3-year period, the spouse who transfers the asset to his/her spouse had acquired the property in whole or in part by gift or by inter vivos transfer for less than adequate and full consideration in money or money’s worth. §1022(d)(1)(C)(ii)

Q. What About IRA's and other Income in Respect of a Decedent?
Answer: Basis increase does not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691. Retirement plans and other IRD will not be eligible for the allocation of step-up basis. IRA's will be taxed as "ordinary income," not capital gains. §1022(f).

Q. Will Life Insurance Proceeds Need an Adjustment in Basis?
Answer: Life insurance will retain its long standing tax-privileged status under the new adjusted basis regime. The income tax exclusion for life insurance proceeds is untouched. No need to allocate any of the decedent's carryover basis adjustments to life insurance.

Q. Can people get around the "carry over" basis rules by loading up on debt?
Answer: There will be recognition of gain if a loss exceeds the adjusted basis. §1001.

Q. Is the spousal adjustment of $3 million in addition to the aggregate basis adjustment of $1.3 million?
Answer: Yes. In addition to the aggregate basis increase, the spouse gets another $3 million adjustment. With planning, a couple can pass assets worth up to $4.3 million with no capital gains tax when the assets are sold by heirs. The adjustment is allowed only for property passing to a surviving spouse outright or in a qualified terminable interest property "QTIP" trust.

The spousal exception to the 3 year rule against gifts could be used by one spouse to transfer an asset with a low basis to an ill spouse, who could then leave the asset by bequest, devise or inheritance to the surviving spouse with an increased basis!
The spouse could then sell the asset for FMV without recognizing any federal capital gains tax. This concept may become known as "basis laundering" for married couples.