Carryover basis for property acquired from a decedent dying during 2010.

• Author: Nuckolls, John M.

If property is inherited or otherwise received from a decedent, how does the estate or its beneficiaries determine the basis acquired? Prior to 2010, the general rule was that property received from a decedent acquired a new basis equal to the fair market value (FMV) of the property at the date of the decedent's death (or alternate valuation date, if applicable) (Sec. 1014; but for inapplicability after 2009, see Sec. 1014(e)). For property acquired from a decedent dying during 2010, a modified carryover basis regime will apply (Sec. 1022).

This new modified carryover basis regime is a direct result of the repeal of the estate and generation-skipping transfer (GST) taxes effective January 1, 2010. The Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), included provisions resulting in the repeal of the estate and GST taxes for one year commencing January 1, 2010, along with the adoption of modified carryover basis for 2010. Although the leaders of Congress and the administration had indicated their intention to revise the law during 2009 so that the 2009 rates and exemptions and the stepup basis rules would apply during 2010, that did not happen. Thus, effective January 1, 2010, the estate tax and the GST tax are both repealed for one year. Some members of Congress have indicated a desire to retroactively impose the taxes and repeal modified carryover basis to January 1. There is uncertainty about whether a retroactive enactment of these estate and GST taxes would be constitutional.

Generally, subject to certain statutory permitted basis adjustments by the executor, the modified carryover basis regime will provide the estate or beneficiary receiving property from a decedent with a basis equal to the lesser of the decedent's basis or the property's FMV as of the date of death (Sec. 1022(a)). The modified carryover basis regime will place a huge burden on executors, trustees of a decedent's revocable trusts, beneficiaries, heirs, and their advisers to determine the basis of assets acquired from a decedent, especially if the estate has built-in gain in excess of $1.3 million.

General Rule

The general rule is that property acquired from a decedent dying after December 31, 2009, should be treated as if the property had been acquired by gift, and the basis of the person acquiring the property should equal the lesser of the adjusted basis of the decedent's property or the FMV of the property at the date of the decedent's death (Sec. 1022(a)). With the repeal of the estate tax, the step-up in basis of the decedent's assets has been lost. The decedent's assets will step down if they have a value less than their basis, but they will no longer step up.

For the modified carryover basis rules to apply, the property must have been "property acquired from the decedent" (Sec. 1022(a)(1)). Such property includes the following:

* Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent;

* Property transferred by the decedent during his or her lifetime to a qualified revocable trust (as defined in Sec. 645(b)(1));

* Property transferred by the decedent during his or her lifetime to any other trust for which the decedent reserved the right to make any change in the enjoyment thereof through the exercise of the power to alter, amend, or terminate the trust; and

* Any other property passing from the decedent by reason of death to the extent that the property passed without consideration (Sec. 1022(e)).

Clearly, any property passing through the decedent's estate will fall within the modified carryover basis regime. Assets transferred during lifetime by the decedent into the typical revocable living trust will likewise be subject to the modified carryover basis regime because such a trust will qualify as a qualified revocable trust. A qualified revocable trust is any trust (or portion thereof) that on the date of the decedent's death was treated as owned by the decedent under Sec. 676 by reason of a power held by the decedent to revest in the decedent title to the property of the trust (determined without regard to Sec. 672(e)) (Sec. 645(b)(1) and Regs. Sec. 1.645-1(b)(1)).

Sec. 672(e) attributes powers or interests held by...