Estate Tax Changes Could Affect Sellers to ESOPs

The surprise failure by Congress to address the one-year lapse in the estate tax effective in 2010 means that if replacement securities owned by a seller to an ESOP who took a Section 1042 tax deferral on the sale are passed to an estate, they could be subject to capital gains taxes, at least for the portion above $1.3 million. Under the old law, estates were subject to taxation for amounts in excess of $3.5 million as of 2009. But capital gains were "stepped up" on death, meaning that no capital gains taxes were due at that time and a new basis was established as of the value at the date of death. That step-up in basis partially disappears in 2010 for amounts over $1.3 million, or $4.3 million for a surviving spouse. The estate tax and step-up in basis are scheduled to return in 2011.

It is possible that Congress will enact retroactive legislation to address this before 2011.