Currently, there is no estate or generation-skipping transfer tax for 2010, but both taxes are scheduled to be reinstated in 2011, with a $1 million estate tax exemption, a GST tax exemption of approximately $1,340,000, and a top rate of 55 percent.

The federal gift tax, however, remains in effect for 2010, with a $1 million lifetime exemption and a top rate of 35 percent. Of course, it’s still possible that we’ll see legislative action in the coming months.

Current 2010 rules

While the joke may be that this is a good year to die, in reality, it’s not that simple. True, there’s no federal estate tax — at least for the moment — but the rules that now apply in 2010 change the way inherited property is taxed—in a way that is not always favorable. This means that some individuals who inherit property in 2010 may be in for a surprise when they sell inherited assets. It’s all because of a change in the way cost basis is calculated for property inherited as a result of a death.

New cost basis rules for 2010

The cost basis of an asset is generally its purchase price, and it’s used to calculate taxable gain or loss when the asset is sold. For example, if you own a share of stock, your cost basis is generally the purchase price plus any commissions incurred in the purchase. With real property, your cost basis is increased if you make capital improvements.

Prior to 2010, the cost basis of any asset you inherited was generally stepped up or stepped down to what the asset was worth on the day that the person who left you the property died.

If you inherit property as a result of a death in 2010, however, this step-up rule does not apply. Your basis in the inherited property is the lower of the property’s fair market value as of the date of death or the deceased owner’s cost basis.

There are two very important exceptions. First, every estate gets a $1.3 million increase in basis that can be allocated among assets by the executor of the estate, increased by unused built in losses and loss carryovers. Second, there is generally an additional $3 million increase in basis available for assets passing to a surviving spouse. This means the basis of assets in an estate with a surviving spouse as a beneficiary can potentially be increased up to $4.3 million.

So, if the appreciation of assets in the estate is $1.3 million or less (or $4.3 million for a surviving spouse), then the basis of those assets can be increased to fair market value as of the date of death.

Questions on this complex issue should be addressed to your CPA.

Nancy M. Kennedy is a certified public accountant at Silas Simmons, LLP in Natchez. She can be reached at 601-442-7411.