For estates of decedents dying in 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGGTRA”), commonly referred to as the Bush tax cuts, repealed the federal estate tax and substituted a modified carryover basis regime for a step-up basis regime for purposes of determining the cost basis of inherited assets in the hands of an estate beneficiary. As a result, a beneficiary wishing to sell or otherwise dispose of a highly appreciated asset inherited from the estate of a decedent dying in 2010 might be faced with a substantial capital gains tax on the portion of that appreciation which occurred prior to the decedent's death, a tax which the beneficiary would have avoided under the step-up basis rules. The carryover basis rules, codified in Section 1022 of the Internal Revenue Code of 1986 [“IRC”], are said to be modified insofar as the executor is allowed to allocate to certain assets additional basis consisting of a general increase of $1.3 million, plus a spousal property increase of $3 million.
Tax legislation passed at the end of 2010, formally known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Relief Act”), which was made retroactive to January 1, 2010, reinstated a 35% estate tax rate for decedents dying in 2010, subject to a $5 million exemption, but allows the executor to elect out of the estate tax by agreeing to have the modified carryover basis rules of IRC §1022 apply to the estate's assets in lieu of the (generally more favorable) step-up basis rules of IRC §1014. This election by the fiduciary is referred to as a “Section 1022 election.”
Now, 8 months after the passage of the 2010 Tax Relief Act, IRS has finally released its much-anticipated guidance on the time and manner governing an executor's election to opt out of the federal estate tax. The guidance is set forth in IRS Notice 2011-66, to be published at page 2011-35 of the Internal Revenue Bulletin on August 29, 2011. The §1022 election, which is irrevocable, may only be made on Form 8939 [“Allocation of Increase in Basis for Property Acquired from a Decedent”], and must be filed on or before November 15, 2011. IRS has cautioned that no extensions of time to file Form 8939 will be granted and that it will not accept any Form 8939 filed after the due date, except in the event of conflicted filings or under certain very limited situations as described in the notice.
An executor may not file both an estate tax return [Form 706] and a conditional Form 8939 which would become effective only if an estate tax audit resulted in an increase in the gross estate above the $5 million exemption amount; IRS will not allow executors of large estates to play that wait-and-see game. The executor must report and value, on Form 8939, all property belonging to the estate, excluding cash. Further, the executor must report all appreciated property acquired from the decedent, valued as of the decedent's date of death, required to be included on the donor's federal gift tax return, Form 709, if such property was acquired by the decedent by way of a gift or other lifetime transfer for less than an adequate and full consideration in money or money's worth during the 3-year period ending on the decedent's date of death. An exception for spousal gift applies to this 3-year rule.
If an executor of the estate has not been appointed, any person in actual or constructive possession of property acquired from the decedent may file Form 8939 with respect to the property of which such person is in actual or constructive possession. In addition, if a Section 1022 election is made to apply th
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