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Relief, Unemployment Reauthorization, and Job Creation Act of 2010 reinstated the estate tax for 2010 after it had been repealed under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001.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.