Post-Death Estate Planning Issues for 2010

By Nevius, Alistair M. | Journal of Accountancy, April 2011 | Go to article overview
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Post-Death Estate Planning Issues for 2010


Nevius, Alistair M., Journal of Accountancy


The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) (PL 111-312) revised tax law for estates of decedents dying in 2010, 2011 or 2012. The new rules apply for 2010 unless an executor elects to use prior law. Elections for 2010 decedents can be made for at least nine months from Dec. 17, 2010, so estates of decedents dying in early 2010 can still be made timely.

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The election provides executors with a choice between (1) an estate tax with a top rate of 35%, a $5 million exemption, and a step-up in basis of assets to fair market value at the date of death or alternate valuation date, or (2) no estate tax, but assets in the estate receive no step-up in basis to fair market value. Under choice (2), the basis in heirs' assets will be determined under modified carryover basis rules in IRC [section] 1022, treating property as acquired by gift, with basis being the lower of the decedent's adjusted basis at date of death or fair market value at death. However, basis of estate assets can be stepped-up to $1.3 million (increased for unrealized losses and unused capital losses and net operating loss carryovers not exceeding fair market value at death) plus an additional allocation of $3 million if the assets are redistributed to the spouse.

The election to apply prior law may create traps for executors and affect beneficiaries, so understanding the election and preparing scenarios for 2010 deaths using old and new law is critical in post-death planning. The election will in some cases result in a lower estate tax but create income tax burdens for selected beneficiaries by applying modified carryover basis. Executors may be called upon to justify their choice to use the old rules or the new rules by some classes of heirs, possibly leading to litigation by parties who are negatively affected.

For example, depending on the terms of the will, estate taxes may be paid from the residuary estate and not burden specific bequests.

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