Important Tax Options for Estates of Those Who Passed Away in 2010

For trustees and personal representatives of 2010 estates, new legislation passed on December 17, 2010, provides two options for tax treatment of assets from an estate created in 2010.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made sweeping changes to estate taxes for 2011 and 2012 and retroactively made several changes for estates in 2010.

The new estate tax law allows an estate created in 2010 to elect out of the estate tax for 2010 which results in the application of the modified carryover basis rules.

Option One – Modified Carryover Basis

Elect out of the estate tax and complete IRS Form 8939 to allocate which assets in the estate will have their basis increased to the value of the assets as of the decedent’s date of death. This allocation is limited to $1,300,000 for non-spouse beneficiaries and $3,000,000 for a spouse beneficiary.

The executor of the estate is given the authority to complete the Form 8939 and make such allocations of the basis. There are also additional increases for capital loss carryovers and other losses. The proposed allocation must be provided to the beneficiaries prior to the election.

The basis step-up still does not apply to property which is considered “income in respect of a decedent” which includes traditional IRAs and 401(k)s.

Option Two – Five Million Dollar Estate Tax Exemption

Elect to subject the estate assets to estate tax and obtain a basis increase for all assets of the estate. The estate tax exemption amount was increased to $5 million for 2010 at a rate of 35% tax for assets over the $5 million.

For 2010 estates under $5 million, electing into the estate tax makes perfect sense.

If the decedent’s total value of assets on his or her date of death was under $5 million, electing into the estate tax allows the basis of the assets to be increased to a maximum of $5 million (depending on the date of death value) without paying estate tax. Even 2010 estates which have assets over $5 million need to evaluate whether electing to pay the estate tax would result in less tax than electing to allocate the limited basis amounts.

Similar to the modified carryover basis rules, IRAS, 401(k)s, and other qualified retirement plan assets are not eligible for a basis increase.

Action Steps

Whether to elect in or out of the estate tax exemption is unique to each situation.

Trustees and personal representatives of 2010 estates are advised to seek professional advice on which election is best. A fiduciary for a 2010 estate making the modified carryover basis election should carefully weigh each election against the duties the fiduciary owes to each beneficiary of the trust or estate.

Notice of the election and which assets are being chosen for the carryover basis step-up should be provided to each beneficiary prior to the election being made. All elections should be completed in a timely manner to comply with the Act’s requirement of filing such elections with the IRS within nine months from the date of enactment.