Legislation
enacted nearly 10 years ago repeals the estate tax for
individuals dying in 2010, and then brings it back for
those dying after 2010. Although many had thought
Congress would revoke the repeal for 2010, and keep the
tax at 2009’s level, that has not happened yet.
Last December, the House
by a vote of 225-200 approved H.R. 4154, the “Permanent
Estate Tax Relief for Families, Farmers, and Small
Businesses Act of 2009.” The bill made permanent the
estate, gift, and generation skipping transfer (GST) tax
laws in effect for 2009. However, we are now
well into 2010 and the Senate has not taken up that
legislation.
For decedents dying in
2010 and later years, the House-passed legislation
provides for an effective exemption amount for estate
tax purposes of $3.5 million, an effective exemption
amount for gift tax purposes of $1 million and a maximum
estate and gift tax rate of 45%. In addition, the
house-passed bill would repeal the modified carryover
basis rules that apply for purposes of determining basis
in property acquired from a decedent who dies in 2010
(see overview of the computation below) and return to
the step-up/step-down basis method that was in effect
previously.
We have received questions related to
determining the basis of property acquired from
decedents dying in 2010. Barring intervention by
Congress, the step-up/step-down basis adjustment for
inherited assets that was in effect for as long as most
can remember does not apply to 2010. Instead, a
complicated (what else would you expect?) modified
carryover basis system will apply to property acquired
from decedents dying in 2010. Thus, absent of any
retroactive Congressional action, the basis of property
inherited in 2010 is determined as follows:
Lesser of:
(1)
the decedent’s adjusted
basis, or
(2)
the FMV at the date of
death.
Plus:
(3) an allowable
aggregate basis increase of $1,300,000 plus loss
carryovers and built-in losses, and
(4) if applicable, a spousal
property basis increase.
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Aggregate Basis Increase &
Spousal Increase Worksheet |
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Aggregate Basis
Increase for an Estate |
1,300,000(1) |
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Decedent’s
Carryovers(2): |
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Capital Loss |
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Net Operating Loss |
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Decedent’s
Built-in Losses(3) |
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Total Aggregate
Basis Increase(4) |
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Spouse
Beneficiary additional amount(5)
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3,000,000 |
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Total Aggregate
Basis Increase plus Spousal Amount |
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(1) Substitute $60,000 for a
non-resident alien.
(2)
Tax loss carryovers that would have carried
over to a subsequent tax year but for the
death of the decedent.
(3)
Losses from the sale of the decedent’s
property if it had been sold at FMV
immediately before the decedent's death,
generally to the extent the loss would have
been allowed as a trade or business loss.
(4)
Aggregate basis increase that
is allocated among all the assets of the
decedent. If the amount of the basis
increase available is less than the
unrealized appreciation in the assets whose
bases are eligible to be increased, it will
be up to the executor to determine which
assets receive a basis increase. The basis
of any individual asset cannot be adjusted
above its fair market value.
(5)
Additional basis increase
that is allocated only to the surviving
spouse’s “qualified spousal property”.
Note: If the spouse were the sole
beneficiary, then the spouse would be
entitled $4,300,000 of basis increase plus
allowable carryovers and built-in losses.
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Community Property
– Generally applies where at least one-half of the whole
community interest is included in the decedent's estate;
both the decedent's and the surviving spouse's share of
community property could be eligible for a basis
increase.
Ownership Requirement - Where
property was owned by the decedent and another person as joint tenants with
right of survivorship or as tenants by the entirety, the following ownership
rules will apply:
(A) if the only other person who is a joint tenant or tenant by the entirety is
the surviving spouse, the decedent will be treated as the owner of only 50
percent of the property,
(B) in any case
to which the rule at (A) doesn't apply and in which
the decedent furnished consideration for the
acquisition of the property, the decedent will be
treated as the owner of the property to the extent
of the portion of the property which is
proportionate to that consideration, and
(C) in any case,
to which the rule at (A) doesn't apply and in which
the property has been acquired by gift, bequest,
devise, or inheritance by the decedent and any other
person as joint tenants with right of survivorship
(and their interests are not otherwise specified or
fixed by law), the decedent will be treated as the
owner of the property to the extent of the value of
a fractional part to be determined by dividing the
value of the property by the number of joint tenants
with right of survivorship.
Income in Respect of a Decedent
Property that results in income in respect of a decedent
is not covered by these rules.
This may all be overturned if Congress
gets around to estate tax reform this year. But in the
meantime, please give this office a call if you have
questions.
