More about the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal Revenue Code Section 1022

The Internal Revenue Service has not yet published the form necessary to obtain a step-up in basis for 2010 deaths, but it has published FAQs about the New Tax Rules for Executors for 2010 . 

It appears from the tax law that a tax return (which as of now doesn’t even have a number assigned to it) would be due at the same time as the decedent’s final income tax return (April 15, 2010, unless extended) and would only be required if the estate exceeded $1,300,000 in value or if the decedent received property via gift in the 3 years before death.  The recipients of property to which the step-up in basis is allocated would receive written proof of the step-up within 30 days after the return is filed (which may be too late for some early filers, and cause the need for amended returns.)  

It appears that an automatic basis increase would occur for smaller estates, but the question remains whether estates of less than $1,300,000 should also file the return.  My opinion is that the return should be filed, for how else would the IRS, many years down the road, be able to determine whether a legitimate step-up in basis is being claimed?  If the burden is someday placed back on the taxpayer to prove that the estate was less than $1,300,000, how would the taxpayer be able to prove that point?  In addition, it may make sense to file the return for smaller estates if attempting to achieve a step-up in basis on questionable items under Internal Revenue Code Section 1022, such as reserved life estates (see http://wp.me/pRFoy-8k), reserved powers of appointment (see http://wp.me/pRFoy-90) and irrevocable grantor trusts (see http://wp.me/pRFoy-fW).

Rumors abound that a political compromise may allow taxpayers have the option of using 2009 tax law for 2010 estates. If such a law change doesn’t occur soon, the executors, personal representatives and trustees of larger estates should soon begin the process of determining the adjusted basis in the 2010 decedent’s assets.  Busy accountants often have an available window of time from October 16 on through the end of the year, and larger estates should use that availability to begin dealing with this 2010 tax mess dumped on us all by the 2001 Republican Congress.