For deaths that occurred in 2010, the executor or personal representatives of the estate has the ability to opt out of the estate tax regime. This means that no federal estate tax would be due, but it may come at an income tax cost. When a person dies, the person’s estate receives an income tax benefit in the form of a “cost basis adjustment.” An individual who sells an asset at a gain will usually pay a tax on the gain. When an individual dies, however, any gain that may exist at the time of death is eliminated by a provision under the income tax laws that increases the cost of the assets to the person, called the person’s “cost basis” in the asset, to the value at the time of the person’s death. This is called a “step-up” in the cost basis, and it prevents the person’s assets from being taxed both for estate tax and income tax purposes.
If you choose to opt out of the estate tax in 2010, then the “step-up” provisions also do not apply. Instead, every decedent is allowed a total of $1,300,000 in “step-up” adjustments which the decedent’s executor can allocate to appreciated assets owned by the decedent at death. Such adjustments eliminate up to $1,300,000 of gain in the decedent’s assets (the “basis adjustment amount”). For married individuals, property passing to the spouse (either outright or to a marital trust) is entitled to an additional $3,000,000 of basis adjustments for appreciated assets, which can effectively eliminate $4,300,000 of gain in the decedent’s assets.
On February 16, the IRS issued informal guidance with regard to Form 8939, the federal tax form that will be used to report the cost basis of a decedent and allocate the step-up adjustments for the estates of decedents who died in 2010 and whose executor decides to elect out of the federal estate tax regime. Unofficial information from the IRS also indicates that Form 8939 will be used to make the election to opt out of the estate tax regime as well.
The guidance provides that Form 8939 will be issued at least 90 days before it is required to be filed. Clarification of the issuance of the form and the potential due date was needed in light of the uncertain due date for the form. Under one interpretation, Form 8939 would be due on the due date for the decedent’s final income tax return, Monday, April 18 (as Friday, April 15 is Emancipation Day). It is unclear whether an extension of time to file a decedent’s income tax return would also extend the due date for Form 8939. Under the alternative interpretation, Form 8939 would be due no sooner than 9 months after the enactment of the 2010 Tax Act. This would place the due date no sooner than Monday, September 19 (as Saturday, September 17 falls on the weekend). Regardless of which interpretation is ultimately adopted, executors can take comfort in knowing that the potential April 18 deadline will be pushed back until at least 90 days after the form is finalized.
The filing of Form 8939 and the decision of whether to elect out of the estate tax regime are complex matters that should be discussed with a qualified tax professional. Please contact us if you require our assistance.