Category Archives: Estate Planning

IRS Issues Guidance on Carryover Basis Rules for 2010 Decedents’ Estates

by Matthew Bergman, CPA 

On August 7, 2011, 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. 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.

IRS also provided details on how executors who elect not to have estate tax apply can allocate increase in basis to decedents’ assets.

The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 reinstated the estate tax for 2010 after it had been repealed under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. 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’ basis in assets they inherit is determined under the modified carryover basis rules, 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).

Executors can elect to have the provisions of Section 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, the IRS had not yet released a final version of Form 8939.

The notice 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 Section 6018(e).

Revenue Procedure 2011-41 explains in detail how the allocation of the basis increase works and what assets it applies to. It also discusses how to determine fair market value, gives special rules for community property states, and explains the interaction of section 1022 with other tax provisions.

If the executor of the estate of a decedent who died in 2010 makes the Section 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 executor to elect out of the automatic allocation of the GST exemption.

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

Real Estate Professionals Allowed Late Election to Aggregate Rental Real Estate Interests

by Michael W. Blitstein, CPA 

Revenue Procedure 2011-34

In a Revenue Procedure, IRS has provided guidance that allows certain real estate professionals to make a late election under Regulation § 1.469-9(g) to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules.

Background

Under Code Section 469(c)(1), the PAL disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Regulation § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer’s participation in the activity. However, there are exceptions to the general per se rule.

The Code’s per se rule for rental activities doesn’t apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if: (1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and (2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates.

If a taxpayer is a qualifying real estate professional, the PAL rules generally are applied as if each interest of the taxpayer in real estate were a separate activity. But a qualifying taxpayer may elect to treat all his interests in rental real estate as one activity.

The election is made by filing a statement with the taxpayer’s original income tax return for the tax year. This statement must contain a declaration that the taxpayer is a qualifying taxpayer for the tax year and is making the election under Code Sec. 469(c)(7)(a).

Late filing relief

A taxpayer receiving relief under Revenue Procedure 2011-34 is treated as having made a timely election to treat all interests in rental real estate as a single rental real estate activity as of the tax year for which the late election was requested. A taxpayer is eligible for an extension of time to file an election under Revenue Procedure 2011-34 if he represents in a statement (under penalties of perjury) that he:

… failed to make the election solely because he failed to timely meet the requirements in Regulation § 1.469-9(g);

… filed consistently with having made an election under Regulation § 1.469-9(g) on any return that would have been affected if he had timely made the election. He must have filed all required federal income tax returns consistent with the requested aggregation for all of the years, including and following the year he intends the requested aggregation to be effective, and no tax returns containing positions inconsistent with the requested aggregation may have been filed by or with respect to him during any of the tax years;

… timely filed each return that would have been affected by the election if it had been timely made. He will be treated as having timely filed a required tax or information return if the return is filed within six months after its due date, excluding extensions; and

… has reasonable cause for failing to meet the requirements in Regulation § 1.469-9(g)

A taxpayer must attach the statement required to an amended return for the most recent tax year and mail it to the IRS service center where the taxpayer will file its current year tax return. The statement must contain the declaration required by Regulation § 1.469-9(g), explain the reason for the failure to file a timely election, and include the above representations. The statement must identify the tax year for which it seeks to make the late election and must state at the top “FILED PURSUANT TO REVENUE PROCEDURE 2011-34.”


MARKET CRASH OFFERS ESTATE PLANNING OPPORTUNITY

By: Donald J. Schaffer, CPA/ABV, CVA

The stock market is down by more than a third, the real estate market has given up years of gains, your business is off from prior years’ performance, and the economic outlook is decidedly gloomy. But there is a silver lining for those whose estates are larger than the current Estate Tax exemption level of $3.5 million.

Now is a great time to think about wealth transfers to the younger generation. By combining depressed asset values with other Estate Planning techniques you may be able to transfer wealth at bargain basement prices, saving Estate Taxes that begin at a rate of 45% on each dollar over the exemption. Transferring minority interests in a business, commercial real estate, or family investment entity right now to insure continuity and train the next generation makes sound business sense. And it may also result in valuation discounts averaging from 10% to as high as 40% of today’s already depressed market value.

Don Schaffer is a CPA and member of the CJBS Business Valuation, Systems Consulting and Tax Practices team. Don works with numerous Estate Attorneys in developing tax saving plans for high net worth individuals and businesses. He also provides litigation support in the areas of valuation and investigative accounting for business disputes and marital dissolution cases.

Contact Don at numbersman@CJBS.com.