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COUNTDOWN 2011: DEATH AND TAXES – A FEW CRITICAL CONSIDERATIONS NOW FOR DEATHS THAT OCCURRED IN 2010

12/16/2011

First, a disclaimer – we are not *experts* in estate tax and defer to those who are.  We dabble in it simply because death affects our clients and we know just enough to direct them to the proper expert.

That said, the years 2010 and 2011 created paradigm shifts – everything you thought you knew about estate tax (like the need for marital bypass trusts and step-up in basis for spouses) has been altered, but perhaps not forever.   Remember how there was no estate tax in 2010?  Then Congress compromised and set an estate tax exclusion threshold of $5,000,000 per spouse for 2010 through 2012, with a max tax rate of 35%.  And what happens in 2013?  Well, who knows?  Congress has yet to figure that out.  The way it stands, estate exclusion thresholds will return to $1,000,000 in 2013 if Congress fails to act, with a max tax rate of 55%.  Forgive me for sounding jaded, but since many members of Congress have estates in excess of $1,000,000 – they will not fail to act this time around as they did in 2010.

So what about the “no estate tax in 2010?”  The 2010 Tax Relief Act mentioned in yesterday’s blog reinstated the estate tax for deaths in 2010-2012 with a $5M per person exclusion and max tax rate of 35%.  However, it came so late in the year (mid-December) that it allowed estates executors to elect the zero estate tax along with an allocation of limited additional basis for certain properties (up to $1.3M for non-spouse and additional $3M for surviving spouse – to be allocated asset by asset—and of course, there are a couple of other complications).  This is referred to as the Section 1022 Election and it is made by filing Form 8939AND the deadline for making the election and filing the form is January 17, 2012.  There are no extensions.  If you are an executor of a 2010 estate and think you made this election sometime in the past year, you must do it again using the form.  This is incredibly important.  Once the election is made with the form, it is irrevocable.  If you have not heard from your estate attorney about this issue, call now.  The deadline is coming like a freight train.  If the estate makes the Section 1022 election, it does not file Form 706 no matter how large the estate is.  There is no tax and only limited step-up in basis.

If the Section 1022 Election is not made, the applicable exclusion amount is $5,000,000 and there is a step-up in basis for all assets.  The estate must file Form 706 — but only if the estate exceeds $5M.

So what does this mean?

  •  For small estates that are less than the $5M threshold, consider (with competent counsel…this blog is not “competent counsel”) doing NOTHING.  The estate will then fall under the $5M exclusion rule – that is, the estate need not file Form 706 (because it is too small) AND the estate will enjoy a step-up in basis of all assets.  Good news for small estates – but there can be exceptions – so – competent counsel is advised!
  •  For large estates that exceed, for example, $20M, consider (with competent counsel…this blog is not “competent counsel”) making the Section 1022 Election which provides some step-up in basis (the $1.3M nonspousal and additional $3M spousal allocations) along with NO taxation.  File Form 8939 by January 17, 2012.  Failure to file = $5M exclusion, 35% tax on excess, and Form 706 is mandatory.
  •  For medium-sized estates between $5M and $20M, the executor is in for some sleepless nights—with or without competent counsel – but do get counsel (and again, this blog does not represent “competent counsel”).  To avoid future litigation, the executor must attempt to determine whether it is better to benefit the current estate with no taxation OR benefit the heirs with across-the-board steps-up in basis to minimize their future taxation when inherited assets are sold.  This includes determining which assets to “bless” with the allocation of limited steps-up in the event Section 1022 Election is made; which assets should remain with the surviving spouse under Section 1022 Election; capital gains rates in the future; life expectancies of heirs.  Et cetera.  I am glad I am not executing any estates from 2010!

For more info – these are good articles to reference:

http://mcgladrey.com/Tax-Services/Estate-and-gift-tax-guidance-released

http://onesource.thomsonreuters.com/solutions/trust-tax/trust-tax-us/tax-technical-informaton/article1/

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