The U.S. Senate adjourned for the holidays without extending the 2009 estate tax law into 2010. This means there will be no tax on estates of those dying residents of Florida during 2010 unless Congress subsequently reinstates the estate tax retroactively in 2010, which is not guaranteed. However, in 2011 the estate tax is to be restored at a rate of 55 percent on estates of $1 million or more.
In 2009, the federal income tax laws assigned to inherited property a tax basis equal to the fair market value of that property on the date of the decedent’s death or six months later, if the alternate valuation date is selected. This step-up or step-down in the basis eliminated the recognition of income tax on the increase in the value of the property that occurred before the death of the deceased person devising the property, and eliminated the tax benefit from any unrealized loss. This exclusion of the gain from income taxation was due to a concern that a double tax existed when a beneficiary was subject to an estate tax and an income tax on inherited property. Since beneficiaries receiving property due to inheritance will not be subject to a federal estate tax in 2010, the current law’s step-up in basis rule is replaced with a modified carryover basis rule.
Beginning in 2010, inherited property will have a basis equal to the lesser of its fair market value on the date of death or the decedent’s adjusted cost basis in the property. However, a modified carryover basis rule will apply to these assets. The first modification to the adjusted cost basis rule is that the basis in each inherited asset will be increased proportionately so that the basis of all the estate’s property will be increased to an aggregate basis of $1,300,000. In addition, the basis in property left to a spouse outright or in a qualified terminal interest trust for a surviving spouse will increase to an additional aggregate of $3,000,000. This means that the basis of property transferred to a surviving spouse can be increased by as much as $4,300,000 in 2010 if it is devised to a spouse.

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