IRS Gives Some Answers in Uncertain Estate Tax Times

09/09/2010

Recently, the IRS website provided some answers to frequently asked questions personal representatives or executors may have for 2010 tax issues given the repeal of the estate and generation-skipping transfer tax.

Some of the questions and answers are summarized below:

The IRS Says There Is No Need To File Form 706 For A Decedent Who Died In 2010.

Because the estate tax is repealed for decedents dying in 2010, no estate tax is due and there is no need to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.  Section 6018 of the Internal Revenue Code no longer requires the filing of an estate tax return.  In addition, the most recent revision of Form 706, dated September 9, 2009, is applicable only to decedents dying after December 31, 2008 and before January 1, 2010.  There is no Form 706 for decedents dying after December 31, 2009.

In addition, and as stated in this Blog before, if you file a Form 706 for a decedent dying in 2010, the IRS has now officially stated on its website that it will not accept the return and it will be sent back to you.

Will The Estate Tax Return In 2011?

It would be nice iif the IRS had a crystal ball and answered this question, but it did not.  Instead, the IRS correctly stated that under current legislation, the estate tax repeal will “sunset” effective January 1, 2011.  Therefore, the estate tax is applicable to decedents dying after December 31, 2010 (assuming no future Congressonal action).

What Are The Exemption Amounts And Tax Rates For 2011?

Under current legislation, the exemption amount for estates and gifts is $1 million. For GST transfers, the exemption amount is $1 million with an inflation adjustment.

Further, under current legislation, the maximum rate for estate, gift, and GST tax is 55%, with a surtax for estate and gift transfers between $10 million and $17,184,000.

Once again, this answer assumes the law is allowed to sunset and no further Congressional action is taken.

Will Congress Retroactively Reinstate The Estate Tax For Decedents Dying In 2010?

The IRS admits that it does not know.  If legislation is enacted regarding the estate tax, the IRS states that it  will act swiftly to assess the impact of such legislation and provide guidance to taxpayers regarding their tax obligations and filing requirements.

Will Congress Change The Exemption Amount And Rates For 2011?

The IRS once again admits that it does not know.  The IRS again states that if legislation is enacted regarding the estate, gift or GST tax, it will act swiftly to assess the impact of such legislation and provide guidance to taxpayers regarding their tax obligations and filing requirements.

How Do I Calculate The Basis Of A Decedent’s Assets Who Died In 2010?

The IRS states that generally, for the estates of decedents dying after December 31, 2009 and before January 1, 2011, the basis of assets acquired from the decedent is the lesser of the decedent's adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent's death.

However, there are two important exceptions to this general rule:

  1. The executor can allocate up to $1.3 million (increased by unused losses and loss carryovers) to increase the basis of assets; and
  2. The executor can also allocate an additonal amount, up to $3 million, to increase the bassis of assets passing to a surviving spouse, either outright or in a QTIP Trust.

All Of The Decedent's Property Was Held By A Revocable (Or Living) Trust.  Can The Basis Of That Property Be Increased As Well?

The IRS says probably yes.  The IRS further stated that a decedent is treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in Section 645(b)(1) of the Internal Revenue Code).  Accordingly, it appears that if the trust qualifies as a qualified revocable trust, a step up should be allowed.

The Decedent Had A Power Of Appointment Over Property At The Time Of Death.  Can The Basis Of That Property Be Increased As Well?

The IRS says no. The decedent is not treated as owning any property by reason of holding a power of appointment with respect to such property.

Are There Any Filing Requirements For A Decedent Who Died In 2010?

Yes. Current legislation requires the executor of an estate to file the following tax returns: 

  1. The final income tax return (Form 1040) for the decedent;
  2. A Fiduciary income tax returns (Form 1041) for the estate during administration; and
  3. A  return allocating the allowable basis adjustment to property acquired from a decedent, if the fair market value of the property exceeds $1.3 million or if the decedent acquired property by gift, except in certain cases.
  4. No later than 30 days after the filing of the return allocating the allowable basis adjustment, a written statement to each recipient of property that contains the information on the return.

What Is The Due Date For The Tax Return Allocating The Allowable Basis Adjustment?

The form allocating the allowable basis adjustment must be submitted by the executor with the decedent’s final income tax return.  For decedents dying in 2010, the due date is Friday, April 15, 2011.

What If The Assets Acquired From The Decedent Have A Fair Market Value Of Less Than $1.3 Million? Does The Executor Need To File A Return Allocating The Basis Adjustment?

Maybe. The return allocating the basis adjustment is required only if the property acquired from the decedent is in excess of $1.3 million or if the decedent acquired property by gift, except in the case of certain gifts from decedent’s spouse, during the 3-year period ending on the date of the decedent’s death and the donor was otherwise required to file a return to report the gift.

What Is The Form Number For The Return Used To Allocate The Allowable Basis Adjustment And Where Can I Obtain It?

A form to allocate the allowable basis adjustment due by the executor is currently under construction, and a number has not yet been assigned.  When completed, the form will be posted on the IRS website.

 To see all of the questions and answers, visit the IRS website at FAQ.