Kerry L. Spindler, Esq., Goulston & Storrs, PC
On August 5, 2011, the IRS released Notice 2011-66, providing instruction for how and when an executor or administrator of the estate of a decedent who died in 2010 can elect out of the estate tax/step-up basis rules of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA) and into the zero estate tax/modified carry-over basis rules of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGRTRRA). The Notice also addresses allocation of generation skipping transfer (GST) tax, transfer certificates and elections under I.R.C. § 645.
I. Making a § 1022 Election into EGTRRA’s Zero Estate Tax/Modified Carry-Over Basis Rules
EGTRRA was to have repealed the federal estate tax for decedents dying in 2010 and replace the step-up in basis traditionally available to property transferred at death with a modified carry-over basis regime. The TRA restored the federal estate tax for 2010 decedents, subject to a $5M federal estate tax exemption amount and a 35% maximum federal estate tax rate, and also restored the step-up in basis rules. This notwithstanding, TRA § 301(c) permits the executor or administrator of the estate of a 2010 decedent to elect into EGTRRA’s zero estate tax/modified carry-over basis rules.
A. Making the § 1022 Election
The executor or administrator of an estate of a 2010 decedent may make the § 1022 election by filing Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, no later than November 15, 2011. A Form 8939 filed before November 15, 2011 may be amended or revoked, but only on a subsequent Form 8939 filed no later than November 15, 2011. Otherwise, the election is irrevocable, except under the following circumstances:
- Where the IRS receives multiple Forms 8939 and those forms collectively allocate basis increase in an amount greater than the amount of basis increase available, the IRS will invite the filers to submit a single restated Form 8939.
- Where the sole purpose is to amend a timely filed Form 8939 to allocate Spousal Property Basis Increase (as defined in I.R.C. § 1022(c) and Revenue Procedure 2011-41, also released on August 5, 2011), and the timely filed Form 8939 was complete except for such allocation, the executor or administrator may file an amended Form 8939 no later than 90 days after the distribution of the property to which such increase is allocated.
- Where an executor or administrator filed a timely Form 8939, he or she may file an amended Form 8939 under the automatic six month extension provisions of Treas. Reg. § 301.9100-2. The amended form must be filed no later than May 15, 2012.
- Where an executor or administrator filed a timely Form 8939, he or she may apply for relief to supplement the form under Treas. Reg. § 301.9100-3. The executor or administrator must prove that he or she acted reasonably and in good faith and that the interests of the government are not prejudiced. Moreover, the IRS will grant relief so as to allow supplemental information only if one or both of the following is present: (i) The executor or administrator discovered, after timely filing Form 8939, additional property to which he or she could have allocated basis increase, and/or (ii) the fair market value of the property reported on a timely filed Form 8939 has been adjusted as a result of an IRS examination or inquiry.
- Whether or not the executor or administrator filed a timely Form 8939, he or she may apply for relief to file under Treas. Reg. § 301.9100-3. Again, the executor or administrator must prove that he or she acted reasonably and in good faith and that the interests of the government are not prejudiced. The amount of time that has passed since the decedent’s death may constitute a lack of reasonableness and/or prejudice.
- Persons serving in the United States Armed Forces or affected by a federally declared disaster may have a longer period of time to file Form 8939, pursuant to I.R.C. §§ 7508 and 7508A.
B. Allocating Basis
If the executor or administrator makes a § 1022 election, he or she must also allocate Basis Increase, as defined in Revenue Procedure 2011-41, on Form 8939. The Revenue Procedure provides safe harbor guidance for making such allocation.
C. Reporting Property Acquired from the Decedent
Finally, if the executor or administrator makes a § 1022 election, he or she must value and report all property acquired from the decedent (except cash and property constituting the right to receive income in respect of a decedent) on Form 8939. He or she must report all appreciated property acquired from the decedent, valued as of date of death, that was required to be included on the donor’s gift tax return (Form 709), if the property was acquired by the decedent by gift, or by transfer for less than adequate and full consideration in money or money’s worth, during the three years prior to the decedent’s death (except certain property acquired by the decedent from his or her spouse).
Where the decedent is not a United States citizen, the executor or administrator reports only tangible property situated in the United States acquired from the decedent, and property acquired from the decedent by a United States person.
Individuals acquiring property from a decedent dying in 2010 and subject to a § 1022 election need information about the decedent's basis in the property in order to determine their own basis. Accordingly, within thirty days of filing Form 8939, the executor or administrator must provide a statement to each recipient, regardless of whether the executor or administrator has allocated basis increase to the property received by that person. The statement must include the following information:
- Name, address and phone number of the executor or administrator,N
- ame and TIN of the recipient of the property,
- Description of the property,
- Adjusted basis of the property in the hands of the decedent and its fair market value at the time of death, Decedent's holding period for the property,
- Information regarding whether any gain on the sale of the property would be treated as ordinary income, and
- Amount of basis increase allocated to the property (if any).
II. Allocating GST Tax to 2010 Transfers
TRA § 302(c) set a special GST tax rate of 0% with respect to generation skipping transfers made in 2010. Nevertheless, the other provisions of chapter 13 remain intact with respect to transfers made or deemed to have been made in 2010, including the allocation of GST exemption on a timely filed gift or estate tax return.
A. 2010 Estates
The GST tax applies to 2010 estates, whether or not the decedent’s executor or administrator makes a § 1022 election. Although the applicable rate for 2010 transfers is 0%, an executor or administrator who wants a decedent’s GST exemption to be allocated differently than it would be allocated under the deemed allocation rules must still file a timely federal estate tax return. An executor or administrator making a § 1022 election on Form 8939 must make such allocation on Schedule R of Form 8939.
B. Lifetime Transfers During 2010
If a donor made a lifetime direct skip transfer during 2010 and does not want the IRS to allocate GST exemption to the transfer (because the 2010 applicable rate is 0%), the donor may elect out of the automatic allocation of GST exemption in either of two ways:
- Where the transfer constitutes an inter vivos direct skip not in trust, the donor needs only to timely file a Form 709. Reporting the direct skip on the Form 709 will constitute an election out of automatic allocation of GST exemption to the direct skip not in trust.
- The donor may affirmatively elect out of automatic allocation by timely filing a Form 709 and describing the transfer and the extent to which automatic allocation is not to apply. This is required for all transfers made to GST trusts, regardless of whether the transfer constitutes a direct or an indirect skip.
C. Filing Deadline
Section 301(d)(2) of the TRA extends the due date for filing a gift or estate tax return reporting a GST transfer (direct skip, taxable distribution or taxable termination) made on or after January 1, 2010 but no later than December 16, 2010, to September 17, 2011. Where a GST transfer is being reported on Form 8939’s Schedule R (because the executor or administrator has made a § 1022 election), the form and schedule must be filed no later than November 15, 2011.
The TRA does not extend the due date for returns reporting indirect skips, regardless of when the transfer occurred. It also does not extend the due date for returns electing to treat a trust as a GST trust, or for returns reporting GST transfers that occurred after December 16, 2010.
III. Transfer Certificates
A transfer certificate is not required where a nonresident decedent who is not a citizen of the United States died in 2010 and the decedent’s executor or administrator makes a § 1022 election. The IRS will not issue transfer certificates in such cases.
IV. Section 645 Election to Treat a Trust as Part of an Estate
An executor or administrator who makes a § 1022 election, and who also wants to make a § 645 election to treat the trust as part of the estate for income tax purposes, may do so, and such trust will be treated as being part of the estate for all taxable years of the estate ending after the decedent’s date of death and ending before the second anniversary of the decedent’s death.