Carryover Basis Election for 2010 Decedents’ Estates

From the IRS

On August 5, the IRS issued guidance on the time and manner for making the election not to have estate tax apply to estates of decedents who died in 2010 (Notice 2011-66). The election must be made by November 15, 2011. The notice also discusses how donors can elect out of automatic allocation of the generation-skipping transfer (GST) tax exemption for direct skips in 2010 and clarifies when 2010 GST tax returns are due.

The IRS also provided details on how executors who elect not to have estate tax apply can allocate increase in basis to decedents’ assets (Rev. Proc. 2011-41).

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, reinstated the estate tax for 2010 after it had been repealed under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16. However, the Tax Relief Act allows executors of the estates of decedents who died in 2010 to elect to apply the Code as if the estate tax had not been reinstated. Under this election, no estate tax would be due, but assets in the estate do not receive a step-up in basis to fair market value (FMV) at the date of death (or alternate valuation date). Instead, heirs’ bases in assets they inherit is determined under the modified carryover basis rules in Sec. 1022, with their basis being the decedent’s adjusted basis at date of death; however, the executor can elect to allocate up to $1.3 million to increase certain assets’ basis to their FMV at death (basis increase). An additional $3 million of basis increase is available for property passing to the decedent’s surviving spouse.

Executors can elect to have the provisions of Sec. 1022 apply by filing Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, on or before November 15, 2011. The IRS will not grant extensions of time to file Form 8939 and will not accept late-filed forms, except in certain narrowly defined circumstances. However, as this item went to press, the IRS had not yet released a final 2010 version of Form 8939 and had just released Form 706, U.S. Estate (and Generation Skipping Transfer) Tax Return.

Because these forms had not been finalized, on August 8 the AICPA wrote to the IRS, requesting, for all decedents who died in 2010, that the due date for these two forms be 90 days after the issuance, in final form, of whichever of the two forms, together with its set of instructions, is issued last. The AICPA also requested that the due date for the payment of any estate tax be the same as the due date of Form 706 and that estates be given a procedure to request a six-month extension of time to file Form 8939.

Notice 2011-66 explains that executors must allocate the basis increase on Form 8939. The executor must report on Form 8939 all property acquired from the decedent (except cash and rights to receive income in respect of a decedent). The executor must also provide a statement to each recipient of property reported on Form 8939, within 30 days of filing Form 8939, setting forth information required under Sec. 6018(e).

Rev. Proc. 2011-41 explains in detail how the allocation of the basis increase works and to what assets it applies. It also discusses how to determine FMV, gives special rules for community property states, and explains the interaction of Sec. 1022 with other tax provisions.

If the executor of the estate of a decedent who died in 2010 makes the Sec. 1022 election, the executor will allocate the decedent’s available GST exemption by filing Schedule R with Form 8939. The notice provides two ways for the donor to elect out of the automatic allocation of the GST exemption to outright gifts to grandchildren or more remote descendants made in 2010.

The due date for filing a return reporting a direct skip, taxable distribution, or taxable termination that occurred during 2010 (before December 17, 2010) was September 19, 2011, except in the case of Form 8939, Schedule R, which is due November 15, 2011.

The IRS has asked for comments on the guidance provided in the notice. Comments can be e-mailed to notice.comments@irscounsel.treas.gov and should include “Notice 2011-66” in the subject line.