Legal Update: Tax and Estate Preservation

IRS Filing Procedures for Estates of Individuals Dying in 2010

By:  Mark Addison       

2010 has brought with it many challenges associated with the one-year repeal of the Federal estate tax.  A primary challenge involves the implementation of the modified carry-over basis provisions for assets inherited from a decedent dying in 2010.  This modified carry-over basis system replaces the prior system by which assets included in a decedent's estate would receive a new basis equal to the value of the assets on the decedent's date of death.  The IRS has offered guidance regarding the estate tax filing procedures for 2010 and the new modified carry-over basis system.

According to the IRS guidance, since there is no Federal estate tax for 2010, a decedent's personal representative does not need to file a United States Estate Tax Return (IRS Form 706) for a decedent dying in 2010, and the IRS will not accept a Form 706 if one is filed.

Although no Form 706 will need to be filed, a personal representative will still need to file a final 2010 income tax return (IRS Form 1040) for the decedent, any required estate income tax returns (IRS Form 1041) for the decedent's estate, and a gift tax return (IRS Form 709) if taxable gifts were made by the decedent during 2010.

The personal representative will also be required to file a notice of basis allocation in order to allocate additional basis to the decedent's appreciated assets.  The IRS is currently developing a form for the personal representative to report how basis adjustments are allocated.  The new form will be filed along with the decedent's final individual income tax return.

Subject to some allowed modifications, every person who passes away in 2010 will be given $1.3 million of basis that can be used to increase the basis of property held by the deceased individual at the time of his or her death.  There is an additional $3 million of basis adjustment allowed for certain qualified marital interest property left to a surviving spouse.  The basis adjustments must be allocated item by item (asset by asset) and can only be used to adjust the basis of an item up to the fair market value of the item at the time of the decedent's death.  By increasing the basis of an asset with these adjustments, the capital gain will be reduced when the asset is sold and thereby reducing the amount of capital gains tax that may be required to be paid at that time.

 The new basis allocation form should be filed if the property owned by the decedent is in excess of $1.3 million or if the decedent acquired property by gift (other than gifts from the decedent's spouse) during the 3-year period ending on the date of the decedent's death.  The personal representative will also be required to notify each beneficiary in writing how basis was allocated to the assets he or she received.  The written notice to beneficiaries must be given within 30 days of the filing of the carry-over basis form.  The due date for the carry-over basis form will be April 15, 2011.

It is possible that Congress may pass legislation that has a retroactive effective date.  If this is done, the above described filing requirements could change.

If you have any questions about the filing procedures for 2010, please contact one of the members of our Taxation and Estate Preservation Section.