Yes, we are in crisis, but only because we don’t know where we are. Technically, the Federal Estate Tax has been repealed as of January 1, 2010. However, under the current law, the Estate Tax comes back January 1, 2011 but with a lower exemption ($1,000,000) and a higher maximum tax rate (55%). It seems our government caught the entire professional estate planning community flat footed on this one because no one in their right mind anticipated that we would ever see a one year repeal of the estate tax. But here it is. And it is accompanied by an insidious partner, the elimination of the stepped up basis.
A trade off for the estate tax has been that although the assets were taxed at their fair market value as of the date of death, all capital gains which would have been experienced had the assets been sold is eliminated. This was done by increasing the (cost) basis (a step up of cost basis) to its fair market value at date of death. In theory, this prevented the asset from being taxed twice, one by the estate tax, and a second time by the capital gain tax if sold later. When Congress passed the law eliminating the estate tax, they also passed a law eliminating the stepped up basis rules. And while the elimination of the estate tax was for only one year, the elimination of the stepped up basis rules was made permanent. So come 2011, we will have no stepped up basis and will have an estate tax.
Congress tried eliminating the stepped up basis rules for about six months in the 1970’s. It was impossible to administer because it required people who inherited property to determine what their benefactor paid for it. As a practical matter, this is impossible to do; no one has those kinds of records.