As discussed previously on our website, the 2010 Tax Act retroactively reinstated the estate tax to January 1, 2010. However, the Act also provided that for those dying in 2010, the estate can elect out of the estate tax system and go back to no estate tax, but with the modified carryover basis regime.
The modified carryover basis regime allows a $1,300,000 step up in tax cost basis, plus a special $3,000,000 step up in basis for certain assets qualifying for the marital deduction. As a practical matter, electing out of estate tax system and into the modified carryover basis regime will apply mostly to larger estates that are over the $5,000,000 estate tax exemption.
If the estate does not elect out of the estate tax system, then they are allowed a step up or step down in basis to date of death value for assets other than most IRAs, annuities, EE Bonds and certain other assets.
The basis of an asset is important because it is used to determine the taxable gain on the subsequent sale of the property by an estate, trust, or other beneficiary. The higher the basis, the lower the ultimate tax will be.
IRS Form 8939 is the form used to show the modified carry over basis adjustments for estates of decedents dying in 2010. For estates of decedents dying in 2010, Form 8939 was originally required to be filed on or before April 15, 2011. However, since this is a holiday in Washington, D.C., the due date was actually April 18, 2011.
The 2010 Tax Act also provided that the estate tax return filing deadline for decedents dying prior to December 17, 2010 was extended until September 17, 2011. Since September 17, 2011 is a Saturday, the extension is effective until Monday, September 19, 2011.
There have been some practitioners who interpreted the new law to mean that you have until September 19, 2011 to elect out of the estate tax system and file Form 8939. However, there has been some doubt as to whether or not this is correct. Some thought that maybe it was the original due date for the filing of the Form 8939, i.e., April 18, 2011.
The IRS has provided some additional partial guidance. First, keep in mind that neither Form 8939 for reporting modified carryover basis, nor the instructions, are complete. The Form is available only in a draft form that was completed prior to the 2010 Tax Act.
What has been recently clarified by the IRS is that the due date for Form 8939 will be no less than 90 days after the final Form 8939 is published. Since there is currently no form for use in electing out of the estate tax system, it is also likely that the Form 8939 will be used to officially opt out of estate taxation and into the modified carryover basis regime.
With the Form 8939 not being due any sooner than 90 days after it is finalized and published, this seems to suggest that if you elect out of the estate tax system and into the modified carryover basis regime, then the deadline may be earlier or later than the due date for filing an estate tax return, i.e., September 19, 2011. Hopefully this will be further clarified when the Form 8939 and its instructions are finalized.
Another question that has come up is how you document your basis, if you do not opt out of estate taxation, but no estate tax return is due. Keep in mind that if the taxable estate is under $5,000,000, there is no estate tax.
Earlier, there was some talk that the IRS may provide an easier form to use than a Form 706, when there is no taxable estate return required. However, I have not heard of any official IRS comments on this subject.
In the past, when no estate tax return was due, there were two traditional methods. First, you could file an estate tax return for the purpose of documenting your basis. This was also often used if the estate was close to the exemption amount. Second, you could simply gather and keep the same information needed to document the value on the estate tax return and use it to document basis if an asset was sold and if the income tax return was audited.
The issue with estate tax returns is that they are many times more expensive to prepare than income tax returns. However, if it is virtually impossible to have an estate tax due, then it is possible to prepare an estate tax return with much less detail than in the past and at a cost, possibly approaching that of an income tax return. If so, this may be the better route. However, the determination should be made by either an attorney or CPA, experienced in estate tax return preparation.
As we learn more, we will update our website. Please check our website for additional updates.