By Hani Sarji
On August 5, 2011, the IRS published long-awaited guidance for executors of estates of people who died in 2010. Notice 2011-66 explains how these executors can opt out of the estate tax, and Revenue Procedure 2011-41 explains the special tax rules that apply to assets when executors opt out of the estate tax.
The estate tax and the generation-skipping transfer (GST) tax were repealed on January 1, 2010; but on December 17, 2010, President Obama signed a law that reinstated them retroactive to January 1, 2010.
This law gave people who died in 2010 a special tax break: executors of 2010 decedents can opt out of the default estate tax regime. The estate tax rate in 2010 was set at 35% and the exemption was $5 million. The estate tax regime has one benefit: assets received from a decedent are generally stepped-up to fair market value under Internal Revenue Code § 1014.
To remain in the estate tax regime, executors file the form they always filed for taxable estates: Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. On August 1, 2011, the IRS published draft instructions for form 706. These instructions inform that for decedent's dying after December 31, 2009 and before December 17, 2010, the due date for Form 706 is September 19, 2011.
Executors of 2010 decedents can opt out of the estate tax regime by filing a special form: Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent.
Opting out of the estate tax regime also means opting out of the stepped-up basis rule under IRC § 1014 and opting into the modified carryover basis rule under IRC § 1022.
Carryover basis generally means that assets keep the same basis – the basis in the hands of the decedent "carries over" to the recipient. (Note, however, that when basis is greater than fair market value, the basis in the hands of the recipient is limited to that fair market value.)
IRC § 1022 modifies this carryover basis rule because it allows executors to step-up the basis of some assets. Executors can allocate a $1.3 million step-up in basis to assets passing to any person. Executors can allocate an additional $3 million step-up in basis to assets passing either in trust or outright to a surviving spouse. In Revenue Procedure 2011-41, the IRS provides a safe harbor for making these basis allocations.
The IRS estimates "that 7,000 executors of estates who died in 2010 will make the Section 1022 Election and thus will be required to file Form 8939, and that it will take approximately 8 hours to prepare the documentation."
The guidance published by the IRS on August 5, 2011 also answers questions that executors and practitioners have about the GST tax in 2010.
In 2010, the GST tax was also repealed. The December 17, 2010 law reinstated this tax retroactive to January 1, 2010.
The new law gave wealthy taxpayers another tremendous tax break. The GST tax exemption in 2010 was set at $5 million. But the GST tax rate was an unbeatable 0%. Wealthy taxpayers had a brief opportunity to take advantage of this 0% tax break. For more on that rare opportunity, see my earlier post, Congress' Gift To The Wealthy, A GST Tax "Holiday" In 2010 — Act Before The New Year!
In its helpful guidance, the IRS answered pressing questions that were left open in the December 2010 law. Here are some important highlights:
To elect out of the estate tax, executors must file Form 8939. They should not file Form 706 along with Form 8939. The IRS will send a letter to executors who file both forms and provide them 90 days to correct their mistake by filing either a restated Form 8939 or Form 706. (Notice 2011-66)
Form 8939 is due on or before November 15, 2011. (Notice 2011-66)
The IRS provided a safe harbor for executors electing out of the estate tax and allocating the increase of basis under IRC § 1022. (Revenue Procedure 2011-41)
For executors choosing to remain in the estate tax regime, Form 706 is generally due within 9 months after a decedent's death. But for decedents dying after December 31, 2009 and before December 17, 2010, the due date for Form 706 is September 19, 2011. (Draft instructions for Form 706)
Certain generation-skipping transfers were tax free in 2010, but Form 709—United States Gift (and Generation-Skipping Transfer) Tax Return—still has to be filed: "the IRS will interpret the reporting of an inter vivos direct skip not in trust occurring in 2010 on a timely filed Form 709 as constituting the payment of tax (at the rate of zero percent) and therefore as an election out of the automatic allocation of GST exemption to that direct skip." (Notice 2011-66)
Executors of 2010 decedents are still waiting for final forms and instructions. In IR-2011-83, the IRS stated that the final draft of the form to elect out of the estate tax and the related instructions will be available "early this fall."