Executors of 2010 Estates Now Have Choice of Two Different Tax Laws, and Obtaining a Step-up in Basis is Much Easier

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law by President Barack Obama on December 17, 2010, included a provision that pertains to estates of decedents who die during 2010. Now the executors of 2010 estates have the option of choosing between two different laws.

One choice is the 2010 law under Internal Revenue Code Section 1022, which provides that there be no federal estate tax, but instead imposes modified carryover basis rules. For many assets includible in the estate, there would be no automatic step-up in basis, as there had been under the tax laws in effect before 2010. As has been discussed in several posts on this blog, there are a lot of questions about whether life estates, powers of appointment and irrevocable trusts can obtain a step-up in basis under Section 1022. (For my previous posts on what types of assets may be entitled to a step-up in basis, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2)

The other choice now available to executors of 2010 estates is to be subjected to the new 2011-2012 federal estate tax law, which provides for a federal estate tax for estates that exceed $5,000,000. For many estates under $5,000,000, choosing this law would be advantageous because there would be an automatic step-up in basis for assets includible in the gross estate, just as there had been under the tax laws in effect before 2010.

The default provision in Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is the 2011-2012 federal estate tax law. Executors of 2010 estates who want the automatic step-up in basis do not have to take any action at all. Executors of estates under $5,000,000 therefore may not have a difficult decision to make, as the default provision in the law could be the preferred choice for all of such estates.  The only complicating factor in favor of electing 2010 law would be Internal Revenue Code Section 121(d)(11), which allows the decedent’s estate, the decedent’s qualified revocable trust or the decedent’s beneficiary (as defined under Section 1022) to utilize the decedent’s $250,000 capital gains exclusion on a sale of the decedent’s principal residence.

Executors of estates that exceed $5,000,000 will have to calculate whether it would be preferable to make a special election to have Section 1022 apply. That election would be made under Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010:

SEC. 301. REINSTATEMENT OF ESTATE TAX; REPEAL OF CARRYOVER BASIS.
(a) In General- Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.
(b) Conforming Amendment- On and after January 1, 2011, paragraph (1) of section 2505(a) of the Internal Revenue Code of 1986 is amended to read as such paragraph would read if section 521(b)(2) of the Economic Growth and Tax Relief Reconciliation Act of 2001 had never been enacted.
(c) Special Election With Respect to Estates of Decedents Dying in 2010- Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary’s delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary’s delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.

If  the above election is made, there would be no federal estate tax, but the modified carryover basis rules would have to be dealt with, and Form 8939 would have to be timely filed. Attached is the 12/16/2010 advance proof copy from the Internal Revenue Service of Form 8939, entitled “Allocation of Increase in Basis for Property Received from a Decedent.”