The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) (PL 111-312) revised tax law for estates of decedents dying in 2010, 2011 or 2012. The new rules apply for 2010 unless an executor elects to use prior law. Elections for 2010 decedents can be made for at least nine months from Dec. 17, 2010, so estates of decedents dying in early 2010 can still be made timely.
The election provides executors with a choice between (1) an estate tax with a top rate of 35%, a $5 million exemption, and a step-up in basis of assets to fair market value at the date of death or alternate valuation date, or (2) no estate tax, but assets in the estate receive no step-up in basis to fair market value. Under choice (2), the basis in heirs’ assets will be determined under modified carryover basis rules in IRC § 1022, treating property as acquired by gift, with basis being the lower of the decedent’s adjusted basis at date of death or fair market value at death. However, basis of estate assets can be stepped-up to $1.3 million (increased for unrealized losses and unused capital losses and net operating loss carryovers not exceeding fair market value at death) plus an additional allocation of $3 million if the assets are redistributed to the spouse.
The election to apply prior law may create traps for executors and affect beneficiaries, so understanding the election and preparing scenarios for 2010 deaths using old and new law is critical in post-death planning. The election will in some cases result in a lower estate tax but create income tax burdens for selected beneficiaries by applying modified carryover basis. Executors may be called upon to justify their choice to use the old rules or the new rules by some classes of heirs, possibly leading to litigation by parties who are negatively affected.
For example, depending on the terms of the will, estate taxes may be paid from the residuary estate and not burden specific bequests. If an election is made to use the old rules and pay no estate tax, which benefits residuary beneficiaries, while giving up a step-up in basis, that election may negatively affect beneficiaries of specific bequests who get a lower basis in assets received and higher income tax if the asset is sold. Will those affected have a cause of action against the executor and other tax planners? Will executors who are also beneficiaries have a conflict of interest when deciding whether to elect old law or new law?
Some commentators have suggested that executors air the issue with beneficiaries and even request a court determination before deciding whether to make the election. Accountants advising executors or preparing estate tax filings might well request some indemnification or make clear that this decision is made by the estate with an understanding of the impact on various classes of beneficiaries.
For a detailed discussion of the issues in this area, see “Death and Taxes: Executors Beware,” by Joseph D. Brophy, CPA/ABV, in the April 2011 issue of The Tax Adviser.
Update: On April 1, 2011, the IRS announced that it is delaying the due date for Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, past its original April 18 due date, but did not announce what the new due date will be (IR-2011-33). Therefore, for decedents who died in 2010, the form does not need to be filed with a decedent’s final Form 1040. A decedent’s final Form 1040 is still due April 18. Click here the full news item.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following subjects in the April 2011 issue of The Tax Adviser:
- An update on individual tax issues.
- State and local corporate tax developments.
- A look at the inclusion of trusts in a decedent’s gross estate.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.
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