Tax Law for Deaths in 2010 Individuals can either select the tax regime of the 2001 Tax Act set for year 2010 – estate tax repealed – or select the tax regime of the 2010 Tax Act that provides an increase to the estate tax exemption of $5 million. Election of 2001 Tax Act The estate tax due on the estate of a person deceased in 2010 is replaced by a capital gain tax. Before 2010, people inheriting property from a decedent were entitled to a step up in basis for the inherited assets for capital gains tax purposes. Under the 2001 Tax Act, the step up in basis is abolished for estates of people dying in 2010 and replaced by a modified carryover basis. The basis is either the value on the date of death or the decedent’s basis in the property, whichever is less. This modified carryover basis system allows for a basis increase of $1.3 million for property passing to anyone and an additional basis increase of $3 million for property passing to the surviving spouse. The $1.3 million and $3 million are indexed for inflation after 2010. The personal representative or executor has the authority to allocate the basis increase to particular assets. Most Wills give the executor the power to “do all acts and things necessary for the management of the estate” and to “make any election under law relating to taxes.” However, it is not certain that the personal representative has the power to allocate to both probate and non-probate assets. In the event of uncertainty, the executor should promptly petition the court to grant the power to make the allocation. Carry Over Basis Although it seems that the personal representative has the authority to make the allocation, the representative, when making the decision as to whether to select the carryover basis election rather than filing an estate tax return, should take into consideration whether the marital deduction share goes to the spouse and whether the non-marital deduction share goes to the deceased spouse’s children. In addition, the personal representative should look at which properties get the limited basis increase and maybe seek a family agreement with court approval or a pro rata allocation with court approval. The executor will file an informational return related to large transfers at death, which includes any estate in which the value of all property exceeds $1.3 million (or $60,000 for a non-resident, non-citizen decedent). The return will generally be due at the same time as the final | income tax return for the decedent (April 15 of the year following the year of death). However, the Tax Act allows an extension. The due date for filing this report may be deferred up to 9 months after the date of enactment (December 17, 2010). Form 8939 released by the IRS on December 16, 2010 is attached. The IRS is currently collecting comments regarding the form. This form may be revised as a result of the Tax Act. Any allocation basis increase must be described on the informational return. The executor will supply each recipient of property with information as to the allocation of basis to property received by that recipient within 30 days after filing the informational return. Each estate will be allowed a stepped-up basis not to exceed a maximum of $1.3 million, meaning that the cost basis of all property beyond $1.3 million will carry over with either the original cost basis or the value as of the date of death, whichever is less. The step-up in basis applies only to “property acquired” from a decedent. Therefore it does not apply to general power of appointment property, property received via a QTIP trust, when the grantor dies during a GRAT or a GRUT, IRA accounts, and property received via gift within 3 years of death except for property received via gift within 3 years of death from a spouse. The surviving spouse will qualify for an additional $3 million. The exclusion is only $60,000 for a non-resident alien. Selection Factors in Selection Carry-Over Basis The executor shall take into consideration the following factors when making the decision between electing for a carryover basis and filing an estate tax return:
|
ARCHIEVES > Tax Impact >