The Internal Revenue Service last week released Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) and the related instructions. This form and the circumstances surrounding its release were discussed in my posts of September 2 and September 14 below.
As you will remember, the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per-person exemption and a maximum rate of 35%. The Act also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, the Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed. The newly released Form 8939 is the vehicle executors use to elect zero estate tax, the modified carryover basis rules, and to allocate a basis increase to certain property acquired from a decedent. This form is due to be filed not later than January 17, 2012. There are no extensions to this date. There are only a few limited circumstances where Service will accept an amended Form 8939. One circumstance is to allocate Spousal Property Basis Increase but only if certain requirements are met, as detailed in the instructions.
Even though an executor may elect out of the estate tax, the generation-skipping transfer (GST) tax provisions continue to apply. The Act, however, provides that the applicable tax rate for each GST occurring during 2010 is zero.
This law, applicable only to estates of decedents dying in 2010, allows the executor to allocate additional basis (Basis Increase) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent at death. If the property is acquired from and owned by the decedent, and if the decedent’s basis in the property is less than the property’s fair market value (FMV) on the decedent’s date of death, then the executor generally may allocate Basis Increase to the property, provided that the property’s total basis may not exceed the property’s FMV on the date of death.
The term Basis Increase means the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) and the Spousal Property Basis Increase. The Aggregate Basis Increase is limited to $1.3 million. In the case of any estate, the aggregate Spousal Property Basis Increase is limited to $3 million. Therefore, the total basis increase allowable is $4.3 million if an estate elects the “no estate tax option” for 2010.
The election is made by filing a timely Form 8939. Generally, once the executor has made the election, it is irrevocable. However, the executor can revoke such an election on a subsequent Form 8939 filed before the due date. Generally, if the executor makes the election, the executor must report all the information required by Form 8939 and its instructions about all property acquired from the decedent other than cash. The executor filing Form 8939 must furnish to each beneficiary of the estate a written statement showing the required information with respect to property acquired from the decedent. Schedule A of Form 8939 should be used to provide this information. Schedule R of Form 8939 is used to allocate the GST exemption. Schedule R-1 is used to inform the trustee of certain trusts of the amount of GST exemption allocated to such trusts. Because the GST tax rate for 2010 is zero, these schedules are not used to compute the GST tax.
As before, I continue to caution that before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to Notice 2011-76. The information above is provided to acquaint the reader with this additional guidance from the Internal Revenue Service. 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
