Category Archives: Estate Tax

Estate Tax, Second to Die, and ‘Portability’

In IR 2011-97, IRS recently reminded executors of estates of married decedents dying after 2010 that they must file an estate tax return in order to pass along the unused estate tax exclusion, available now for the first time, to the decedent’s surviving spouse.  This provision eliminates the need for spouses to retitle property and create certain kinds of trusts solely to take full advantage of each spouse’s exclusion.

IRS says it expects most estates of people who are married will want to make this “portability election,” including people who are not otherwise required to file an estate tax return.  The only way to make the election is by properly and timely filing an estate tax return on Form 706.  Estates of those who died before 2011 are not eligible to make this election.

Another interesting feature of this new scheme is the fact that IRS has authority to examine the return of a predeceased spouse even after the statute of limitations on assessment has expired, to make determinations regarding the deceased spouse’s unused exclusion amount.

Estates unable to meet the Form 706 filing deadline can request an automatic extension (six months) by filing Form 4768 before the original Form 706 due date, which is nine months after the date of death.

Got questions about estate tax? Get answers in Nolo’s Estate and Gift Tax FAQ.

IRS Issues Guidance for 2010 Decedents’ Estates

IRS issued a couple of important pronouncements last week that could be of interest for executors of 2010 decedents’ estates.

Recall that 2001 legislation repealed the application of the federal estate tax to estates of people who died in 2010. On December 17, 2010, however, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (TRUIRJCA) was enacted, retroactively reinstating the estate tax. However, one of the provisions of TRUIRJCA allows the executor of the estate of a 2010 decedent to “opt out” of the estate tax, and thereby have the carryover basis rules apply, with certain potentially important modifications.

These executors will be required to file Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent. The Form will be due November 15, 2011, though the final version of the form has not yet been published by IRS! (for now, you can see the draft version here)

Rev Proc 2011-41 (issued August 5, 2011) provides the necessary guidance to executors regarding the “safe harbor” procedures of making the IRC Section 1022 election, and Notice 2011-66 (issued August 5, 2011) provides guidance regarding the time and manner of choosing to opt out of the estate tax and have the modified carryover basis rules apply.

It is important to note that Form 8939 is due November 15, 2011. IRS will not grant extensions of time to file a Form 8939, and will not accept an amended Form 8939 after the due date, with limited exceptions.

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.