Certain uncertainty: what is happening to estate and gift taxes?

• Author: Foss, Mary Kay
• Position: EstatePlanning - Column

In January 2010 we were faced with a world without an estate tax. Most "experts" expected Congress to re-enact the federal estate tax as it applied in 2009.

The world without an estate tax involved "carryover basis'" of property inherited from a decedent who passed away in 2010. In simple terms, the basis of inherited properly would be the lesser of the fair market value at the dale of death or the decedent's cost basis.

To make this more palatable, the executor could allocate an additional $1.3 million to assets valued at the decedent's basis, provided that the allocation would not push the basis over the property's fair market value. For property left to a surviving spouse, S3 million of basis could be allocated in the same way

More complications were added. The $1.3 million would be increased by the unrecognized loss on any property worth less than basis on the date of death, plus unused capital loss carryovers of the decedent, plus unused net operating losses of the decedent. If you think this still seems simple, you haven't considered what happens when there are assets not under the control of the executor, property held in a trust or various trusts in separate tax jurisdictions, or property held jointly with someone other than the surviving spouse.

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How is the amount of basis determined and allocated under those circumstances?

The Economic Growth and Tax Relief Reconciliation Act of 2001 that developed this situation indicated that a tax form would be available to report the basis allocation and a hefty fine would be handed out for those who do not comply. A draft of the form was circulated unofficially in early November, but pulled within days. A second draft of Form 8939 without instructions was released Dec. 16, 2010, and comments were requested within 30 days of the release. The Tax Relief Act of 2010, which reinstated the federal estate tax with a $5 million exemption and a 35 percent maximum tax rate, was not expected at the time the draft was designed.

Under the 2010 act, executors of 2010 estates can elect out of the estate tax and back into carryover basis. The election shall be irrevocable and made on Form 8939. On March 31 the IRS announced that the form is not yet available, is not due April 18, 2011, and should not be attached to the decedent's final Form 1010. Slay tuned.

The following examples are estates that will need to be reviewed separately:

* Gross estate is $4 million: Executor would not...