By: Teresa H. Kendrick, CPA

For many years, property passing from a decedent to his or her heirs was generally valued as of the date of the decedent’s death.  The valuation of the decedent’s property as of the date of death was known as a “step-up” in basis.  The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) repealed the estate tax for one year for decedents dying after December 31, 2009.  Consequently, the “step-up” basis rules were replaced with “modified carryover” basis rules.

On December 17, 2010, The Tax Relief, Unemployment Insurance Reauthorizations, and Job Creation Act of 2010 was passed and the estate tax was retroactively reinstated for 2010.  As a result, the executor of an estate of a decedent dying in 2010 must decide whether or not he or she wants the estate tax to apply.  If the estate tax applies, property passing from the decedent to his or her heirs is eligible for the property to be valued, in general, using the step-up in basis rules.  If the executor for a decedent dying in 2010 decides that the estate tax should not apply, the property passing to heirs will be valued using the modified carryover basis rules.  These rules allow for a $1.3 million aggregate basis increase for assets the decedent held at death.  An additional $3 million in basis step-up is available for properties passing to a decedent’s spouse. The remaining  property in a decedent’s estate that is not subject to estate tax will be valued in the hands of the heirs at the decedent’s adjusted basis or fair market value as of the decedent’s death, whichever is less. 

However, on August 5, 2011, the IRS finally issued guidance on how to apply the new carryover basis rules. If the executor of the estate of a decedent dying in 2010 elects out of estate tax and, accordingly, into the carryover basis rules, the executor will need to file a new IRS Form – Form 8939.  This form will provide information to the IRS, beneficiaries and certain others regarding the bases of properties transferred from the estate to its beneficiaries.  Form 8939 has only been released in draft form at this time.  The instructions for Form 8939, Publication 4895, have not been released.  The absolute due date for filing Form 8939 has also not been released.  Finally, it should be noted that If an executor does not elect out of estate tax, the federal estate tax return is due by the later of September 19, 2011 or nine months after the date of death.    The due date will be extended to at least 90 days after Publication 4895 is released.

The new rules and decisions imposed upon executors of the estate of a decedent dying in 2010 are complex and challenging.  For a more detailed and thorough explanation, please contact our office.