Magazine article The CPA Journal

2010 Estate Tax Repeal, Basis Rules, and Reporting Requirements

Magazine article The CPA Journal

2010 Estate Tax Repeal, Basis Rules, and Reporting Requirements

Article excerpt

In the midst of Congress passing sweeping laws in support of unprecedented federal financial bailouts and approving major national healthcare reform, Congress surprisingly did not act to prevent this year's repeal of the federal estate tax and generation skipping transfer tax (GST). As a result, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), these taxes have been repealed for decedents dying after December 31, 2009, and through December 31, 2010. While this interim repeal may sound tax free, it is trickier than its face value suggests due to the new related modified carryover basis rules under Internal Revenue Code section 1022. These new basis rules replace the historical stepped-up (or stepped-down) basis rules with carryover basis rules, as modified for certain permissible basis increase allocations. Also, as part of the repeal, there is no longer the need to file estate tax returns with the IRS; however, new reporting rules may require executors to file a new type of return under revised IRC section 6018.

Accountants have always been essential to proper estate, gifting, and tax planning; trust administration; and probate. Today's carryover basis rules and reporting requirements make the role of accountants all the more significant. This article focuses on: 1) the 2010 estate tax and GST repeal; 2) the new modified carryover basis mies; 3) the new reporting requirements and related penalties; 4) challenges for fiduciaries; and 5) five things accountants can do today to advise and assist their clients and colleagues during these uncertain times.

2010 Estate Tax and GST Repeal

The EGTRRA provided for a gradual phase-out of the estate tax and GST from 2001 through 2009, with a complete repeal of these taxes for decedents dying after December 31, 2009. Few practitioners expected that the repeal would actually take effect. Many felt certain that Congress would, before the end of 2009, pass a proposed law such as H.R. 4154, which, among other things, proposed permanent maximum estate tax and GST tax rates of 45% and applicable exemption amounts of $3.5 million ($7 million for married couples). While the House passed the bill on December 3, 2009, the Senate did not vote on it. Accordingly, just as President George W. Bush had pledged during his term, the nation entered 2010 without any so-called death taxes. During the first quarter of 2010, there were speculations, which continue today, that Congress would or still will enact legislation imposing an estate tax and GST and repealing the modified carryover basis rules retroactive to January 1, which raises some complicated constitutional law questions.

At the date of publication of this article, it appeared possible that new legislation will not be enacted for 2010. To make matters more confusing, if Congress does not act, then, due to a Senate parliamentary rule (Congressional Budget Act of 1974 section 313, informally referred to as the "Byrd Rule"), the laws repealing the estate tax and GST for 2010 will automatically sunset and the entire act will be repealed as of December 31, 2010. If this occurs, the law will revert back to the pre-EGTRRA law in effect in 2001, which, in essence, would constitute a repeal of the repeal. Thus, if Congress does not act, the 2011 law will include, among other things -

* an estate tax on estates with gross assets valued over $1 million;

* a GST on skip transfers in excess of $1 million, as indexed for inflation from 1997;

* a continued lifetime exemption from the gift tax of $1 million;

* top marginal estate tax, GST, and gift tax rates of 55%, with a 5% estate and gift tax surcharge on estates or gifts above $10 million;

* a stepped-up (or stepped-down) basis for inherited assets;

* the requirement to file an estate tax return for estates with gross assets in excess of $1 million; and

* the return of the state death tax credit allowed against the federal estate tax. …

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