We were talking about the estate tax dilemma. When the law was passed late in 2010, most people thought the biggest problem was that the law would sunset at the end 2012. Alas, we were mistaken. Or, to continue our Rocky & Bullwinkle theme from our last post, when we last saw our heroes they were rushing to the aid of those Florida heirs and personal representatives as they struggled to understand the choices they had to make for the estate of their loved one who passed away in 2010.

Armed only with some law books and a calculator, our T-rexes of the Tax Code arrive in time to try to find the right IRS form.

And that's not easy. The IRS is still working on the revised form 8939, even if the original filing date was April 18. The upshot is that we all have more time to go over the numbers, time and time again.

A recent Wall Street Journal article gave an example of the difference between the 2010 estate tax and the 2011 estate tax, and the results were quite different. Remember, for the estates of people who died in 2010, either tax scheme is an option.

To paraphrase the Journal's example, Fred died in 2010, leaving an estate made up of land and stock. He had purchased them some years ago for $3 million. At the time of his death, his estate was valued at $6 million.

Apply the 2010 rules, and Fred's heirs do not have to pay estate tax. When they sell it all for $7 million, they will have to pay capital gains measured from the $3 million purchase price.

Under the 2011 rules, Fred's heirs must pay estate tax on the amount exceeding the $5 million threshold. This is calculated on the value of Fred's estate at the time he died -- $6 million. Taxes are owed on $1 million. When they sell for $7 million, they must pay capital gains. The difference is that the capital gains are figured on the "stepped up" cost basis: the value of Fred's estate at the time of his death, or $6 million.

While waiting for the new 8939s to come out, finance and investment professionals have been trying to find a magic number, a "crossover" point that will provide an easy analysis of whether the 2011 estate tax will be more beneficial.

We fear this is a question for Mr. Peabody and his pet boy, Sherman. But, oh, that's all the time we have for this week's adventure.

Source: Wall Street Journal, "A tough call for heirs," Arden Dale, 05/21/2011