Taxation & Estate Planning

25 Things You Need To Know About The New Estate Tax Laws: 11-15

By Joel A. Schoenmeyer

A little background: One of the few benefits of the federal estate tax system (from the taxpayer's POV) is that it is accompanied by a step-up in basis. In plain language, that the value of the decedent's property as of the date of his or her death becomes its basis. Basis is no longer the cost the decedent paid for it. An example:

Mary Smith bought shares in ABC Company over 50 years, paying a total of $50,000 for the stock. At the time of her death in 2009, the shares were worth $1,000,000. At Mrs. Smith's death, the basis for the stock became $1,000,000.

Basis is then used to compute capital gain when the property is sold. (If the ABC Company shares are sold after her death for $1,500,000, then there's a taxable gain of $500,000 at sale. If the shares were sold by Mrs. Smith during life for $1,500,000, then the taxable gain would have been a whopping $1,450,000.)

Having a step-up in basis made things really simple for estate representatives, and the benefit accrued to all decedents, even those with small estates not subject to federal estate tax. But when the federal estate tax disappeared for a year in 2010, the step-up in basis rule also disappeared. Instead, the decedent's property continued to have the same basis it had during the decedent's life. This is called "carry-over basis." You might also call it "The Forensic Accountant Full Employment Act of 2010," since someone would have to figure out the cost basis in the decedent's property.

But wait! There was were a couple of loopholes for carry-over basis. For one thing, you got a "free" $1.3 million in basis to apply to property. To return to the above example: If Mary Smith died under the same facts as set forth there, but in 2010, Mary Smith's representative could apply $950,000 of that $1.3 million to her ABC Company stock, thereby stepping up the basis in that stock to its date of death value of $1 million. And, if the property was passing to the decedent's spouse, there was another "free" $3 million in basis.

11. So, up through 2009 we had a federal estate tax, and then in 2010 we didn't. The Act brings back the federal estate tax.

12. The Act allows estates of decedents dying in 2010 (prior to the act's enactment on 12/17/2010) three benefits in terms of tax treatment.

13. Benefit #1: Under Section 301(c) of The Act, an estate representative for a decedent who dies between 1/1/2010 and 12/17/10 can elect "regular" tax treatment (federal estate tax with step-up in basis) or 2010 tax treatment (no federal estate tax but carry-over basis).

14. Benefit #2: The Act (in Section 301(d)) also extends the time (for decedents who died between 1/1/2010 and 12/17/10) for filing:

(a) a federal estate tax return or

(b) a basis allocation document under Section 6018 of the Internal Revenue Code.

The EARLIEST due date for filing such returns is 9/17/11 (9 months after the date of enactment).

15. Benefit #3: Typically you can disclaim property you inherit -- basically, you are saying "thanks but no thanks" to an inheritance, and the inheritance will pass as though you predeceased the decedent. Doing so in a timely manner (making a "qualified disclaimer" under Section 2518 of the Internal Revenue Code) means that disclaiming doesn't carry any gift tax implications, but that Section requires a disclaimer within 9 months of death. The Act (again, in Section 301(d)) also extends the time for filing a qualified disclaimer relating to an inheritance from a decedent who died between 1/1/2010 and 12/17/10. Again, the EARLIEST due date for making such a disclaimer is 9/17/11 (9 months after the date of enactment).

Full post as published by Death and Taxes Blog on January 13, 2011 (boomark / email).