On August 5, 2011, the IRS finally published some guidance for executors of estates of people who died in 2010. Notice 2011-66 explains how these executors can opt-out of the estate tax, and Revenue Procedure 2011-41 explains the special tax rules that apply to assets when executors opt-out of the estate tax.
The estate tax and the Generation-Skipping Transfer (GST) tax were repealed on January 1, 2010; but on December 17, 2010, President Obama signed a law that reinstated them retroactive to January 1, 2010.
This law gave people who died in 2010 a special tax break: executors of 2010 decedents can opt-out of the default estate tax rules. Under the new law, the estate tax rate in 2010 was set at 35% and the exemption was $5 million. This is the same as it now is for 2011 and 2012. This second method of estate tax has one main benefit: assets received from a decedent are generally stepped-up to fair market value under Internal Revenue Code §1014whereas if the executor chooses to opt-out, there is generally no step-up in basis.
To remain with the default estate tax rules, executors file the form they always filed for taxable estates: Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. On August 1, 2011, the IRS finally published draft instructions for Form 706. These instructions inform executors that for decedents dying after December 31, 2009 and before December 17, 2010, the due date for Form 706 is September 19, 2011.
Executors of 2010 decedents can opt-out of the default estate tax rules by filing a special form: Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent. Opting-out of the estate tax also means opting-out of the stepped-up basis rule under IRC §1014 and opting-in to the modified carryover basis rule under IRC §1022.
Carryover basis generally means that assets keep the same basis — the basis in the hands of the decedent “carries over” to the recipient. IRC §1022 modifies this carryover basis rule, because it allows executors to step-up the basis of some assets. Executors can allocate a $1.3 million step-up in basis to assets passing to any person. Executors can allocate an additional $3 million step-up in basis to assets passing either in trust or outright to a surviving spouse. In Revenue Procedure 2011-41, the IRS provides a safe harbor for making these basis allocations.
The IRS estimates that 7,000 executors of estates who died in 2010 will make the Section 1022 Election and thus will be required to file Form 8939. The big question for the executors is what was the total assets (greater than $5 million) in the estate versus what was the capital gain on those assets. If the potential estate tax is greater than the potential capital gains tax, the executor should opt-out so there would be no estate tax. Speaking to a knowledgeable accountant or trust and estates attorney should help answer that question.