Estate Tax Reporting: Confusion Reigns

Recall that pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax was repealed for 2010 decedents. The executors of estates for 2010 decedents were required to file an information return, nonetheless, which was due on the due date of the decedent’s final Form 1040 — or April 18, 2011. Then along came Congress in late 2010 with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) which technically reinstated the estate tax — at the “election” of the executor — for persons who died in 2010.

So, executors are now faced with a dilemma: incur estate tax, in return for asset basis “step up” to full fair market value, or “elect out.” If the election “out” were made by the executor, the “carryover basis” rules apply to assets passing to heirs with a couple of exceptions: the estate would receive $1.3 million of basis “step up”, plus an additional $3 million “step up” for assets passing to a surviving spouse. (Learn more about the role of executors in Nolo’s Executor FAQ.)

But how was this election “out” to be documented?

Initially, IRS released a draft of new Form 8939 (“Allocation of Increase in Basis for Property Acquired From a Decedent”) and suggested that the form was to be filed by April 18, 2011 with the decedent’s final individual income tax return. Then, on March 31, 2011, along came IR 2011-33, wherein IRS explicitly stated:

    “The Treasury Department and the Internal Revenue Service today announced that Form 8939 is not due on April 18, 2011, and should not be filed with the final Form 1040 of persons who died in 2010. New guidance that announces the form due date will be issued at a later date, and Form 8939 will be released soon after guidance is issued.”

All of this leaves executors in a quandary resulting from having to compare the cost of paying some estate tax under the old rules and receiving a full basis step up, thus saving (potentially) future income taxes, or sticking with the carryover basis regime and possibly paying income taxes down the line (when assets may be sold) at some tax rate presently unknown.

In any case, stay tuned — the next issue on the horizon will be the need to wrestle with the final version of Form 8939, at which time the executor’s decision must be made. Rumor has it that the form will be finalized in time to enable a final due date of something like November 15, 2011.