Announcement Concerning New Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010
Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents' basis plus certain increases. IRS has posted an announcement on its website that a publication on this subject (Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010) and the form for allocating these basis increases are still under development.
Background. Before enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per person exemption and a maximum rate of 35%. It also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, Sec. 301(c) of the 2010 Tax Relief Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed.
Under the modified carryover basis rules, 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 exceptions to this general rule:
... The executor can allocate up to $1.3 million, increased by unused losses and loss carryovers ($60,000 in the case of a decedent nonresident who is not a citizen of the United States, but with no loss or loss carryover increase), to increase the basis of assets; and
... The executor can also allocate an additional amount, up to $3 million, to increase the basis of assets passing to a surviving spouse, either outright or in a Qualified Terminable Interest Property (QTIP) trust.
The allocations of the general basis increase and the spousal property basis increase must be made by the executor on the tax return required by Code Sec. 6018. (Code Sec. 1022(d)(3)(A))
Publication 4895 still under development. To provide some guidance until Publication 4895 is available, the announcement provides an overview of who needs Publication 4895, when to expect Publication 4895 to become available, and what topics Publication 4895 will cover, as well as some additional information related to Publication 4895.
Who needs Publication 4895. The announcement notes that the 2010 Instructions for Schedule D (Form 1040) and the 2010 Instructions for Form 1040 instructed taxpayers to follow instructions in Publication 4895 for special rules affecting taxpayers who acquired property from a decedent who died after 2009. However, because of the 2010 Tax Relief Act, as explained above, fewer taxpayers need to refer to Publication 4895. Taxpayers need Publication 4895 only if the executor of the decedent's estate files Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Form 8939 is also in development.
Form 8939 will be used to make the section 301(c) election to choose zero estate tax for a decedent dying in 2010 and to apply the modified carryover basis rules to property acquired from the decedent.
If an executor does not make the 301(c) election, Publication 4895 is not needed because the rules for determining basis, holding period, etc., that were in effect for property acquired from a decedent who died before 2010, will apply to any property acquired from a decedent dying in 2010.
When to expect Publication 4895 and Form 8939. IRS says Publication 4895 will be available following the release of both the final Form 8939 and the Instructions for Form 8939. The final Form 8939 will be posted at least 90 days before it is required to be filed. Although the 2010 Form 8939 has yet to be released, a draft of Form 8939 is available. The 2010 Instructions for Form 8939 are still in the process of being developed. Once final, they will be available at www.irs.gov/pub/irs-pdf/i8939.pdf.
What to expect in Publication 4895. When Publication 4895 is released, it will provide information for executors and recipients regarding property for which a 301(c) election has been made.
For executors, Publication 4895 will explain:
... How to make the 301(c) election;
... Where, when, and how to file Form 8939;
... How to figure the basis increase limit;
... How to report the allocation of basis increase;
... How to report the allocation of generation-skipping transfer tax exemption; and
... What information must be provided to recipients of property.
For recipients of property from a decedent dying in 2010, Publication 4895 will explain:
... What information they should expect to receive from the executor regarding the property they acquired;
... What should be done with information received from the executor; and
... How to determine holding period.
Other pertinent information. IRS also points out that:
... Form 8939 should not be filed with the decedent's final income tax return.
... The 301(c) election should not be made on the decedent's final income tax return.
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