In an April 4 post, this blog briefly reported on the change in estate tax reporting rules for 2010. Readers unfamiliar with this issue should refer to that post below for background. This post will update and correct the April 4 entry.
On Friday, August 5, the Internal Revenue Service issued guidance (Notice 2011-66) addressing these reporting requirements. More specifically, this Notice addresses the time and manner in which the executor of the estate of a decedent who died in 2010 elects to have the estate tax not apply and to have special carryover basis rules apply to property transferred as a result of the decedent’s death. Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) is to be filed only if an executor elects out of the estate tax for 2010. That means that it is not necessary for the executor of an estate below the $5 million exemption amount to file Form 8939 in order to get a step-up in basis for assets acquired from a decedent dying in 2010.
The Notice also addresses how a donor may elect out of the automatic allocation of generation-skipping transfer (GST) tax exemption to direct skips occurring during 2010. It also clarified the due dates for returns for the taxable year ending December 31, 2010 that report a generation-skipping transfer, that allocate GST exemption, or that opt out of the automatic allocation of GST exemption. In these taxing times, nothing is simple, is it?
This Notice applies to executors of the estates of decedents who died in 2010 and to recipients of property acquired from those decedents, if the executors elect out of the estate tax and thereby elect to have the special carryover basis rules applicable only to 2010 apply. It also applies to donors who made a gift during 2010 that is a generation-skipping transfer or an indirect gift for purposes of the GST tax. Readers may also want to refer to Revenue Procedure 2011-41, also issued August 5, for a safe harbor with regard to the interpretation and application of the carryover basis rules. Even though an executor may elect out of the estate tax for 2010, the GST provisions of the Internal Revenue Code nonetheless continue to apply for 2010. The applicable tax rate for each GST occurring during 2010 is zero, however. That means that even though an estate will not pay GST tax on generation-skipping transfers, executors must still allocate a decedent’s GST exemption among assets transferred.
Under the special carryover basis rules applicable to estates of decedents dying in 2010 and which elect out of the estate tax, there is a “general basis increase” of $1.3 million that may be allocated to property passing to any beneficiary. In addition, there is an additional $3 million basis increase that may be allocated to property passing to the decedent’s surviving spouse. It is these two increases in basis that are reported on Form 8939, in addition to allocation of a decedent’s GST exemption. This is not the end of the story, however. A recipient’s basis in a particular property (including the amount of basis increase allocated to that property) is subject to adjustment upon the examination by the IRS of any tax return reporting a value dependent upon the property’s basis (for example, the property’s depreciation, sale, or other disposition that triggers gain or loss on the property, or otherwise). This fight will go on for years!
The executor of the estate of a decedent who died in 2010 may elect out of the estate tax and choose the special carryover basis option by filing Form 8939 on or before November 15, 2011. Once made, the election is irrevocable with certain, very limited, exceptions. There is generally no extension available for filing this form. The executor must also give the beneficiaries of the estate a statement with information as to the basis of the assets within 30 days after filing Form 8939. Prior filings purporting to make this election must be replaced with a timely filed Form 8939. Note, however, that a final Form 8939 is still not available. The IRS expects to issue a final Form 8939 and the related instructions early this fall. If the executor of a decedent who died in 2010 elects out of the estate tax, the executor allocates that decedent’s available GST exemption by attaching Schedule R of Form 8939 to the Form 8939 for that decedent’s estate. If the Form 8939 is timely filed, this allocation will be considered a timely allocation of the decedent’s GST exemption.
Here’s more “good news.” The due date for filing a return reporting a generation-skipping transfer (direct skip, taxable distribution, or taxable termination, including any election required to be made on such return) that occurred on or after January 1, 2010, through December 16, 2010, is September 19, 2011, including extensions, except in the case of a Schedule R attached to Form 8939, which is due on or before November 15, 2011. To the extent a return relates to an indirect skip, or to a post-December 16, 2010, direct skip, the due date of the return is not extended. Thus, the due date for filing a gift tax return (Form 709) that does not report a GST transfer or that reports a GST transfer (or any election pertaining to such transfer) that occurs on or after December 17, 2010, through December 31, 2010, was April 18, 2011, including extensions. In addition, the due date for filing a Form 709 to elect to treat a trust as a GST trust or to allocate GST exemption to a transfer occurring during 2010 was April 18, 2011, including extensions. If, however, a donor timely filed Form 709 for the taxable year ending December 31, 2010, but failed to allocate GST exemption to a transfer occurring during such year, there is possible relief. Clear as drilling mud!
The reader must understand that this is a very brief summary of a highly technical, 13-page Notice. Before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to the full Notice 2011-66 and Revenue Procedure 2011-41. The information above is provided to acquaint the reader with this new guidance from the Internal Revenue Service. I will continue to follow developments in this area and will report release of Form 8939 and the related instructions once the Service makes them available. If you have additional questions concerning filing requirements for 2010 lifetime gifts or testamentary transfers, contact me at 214.957.3366 or via email at response@phdcpa.com
Ronnie
Copyright 2011, Ronnie C. McClure, PhD, CPA
