Game changers 2010: Estate Planning and administration for 2010 decedents.

• Author: Malekhedayat, Julie

The end of 2010 will bring an end to a host of new and changing estate and gift tax rules the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 put into action. Alas, effective only in 2010 is the act's repeal of the estate and generation-skipping transfer (GST) taxes and change in the maximum gift tax rate.

In 2011, after EGTRRA's sunset, the transfer tax rules are scheduled to revert hack to pre-EGTRRA status ($1 million exemption and maximum .55 percent lax rate for gift, estate and GST taxes).

Although practitioners believed Congress would act well before EGTRRA's sunset date and change the 2010 estate laws, other pressing issues, including the nationwide economic woes and health care reform, have so far stolen the legislative spotlight and no changes to the status quo have been enacted.

Thus, if Congress does not reinstate or modify the estate and gift lax rules for 2010--either retroactively or prospectively--the current scheme of no estate taxes, no GST taxes and a gift tax rate of 35 percent will apply in 2010. Assets inherited from 2010 decedents will pass to beneficiaries under a set of new modified carryover basis rules under IRC Sec. 1022 instead of the familiar stepped-tip basis rules of IRC Sec. 1014.

Modified Carryover Basis

The modified carryover basis rules provide for a $l.3 million step-up in tax basis over the decedent's tax basis, up to the lair market value at the date of death, for the assets of decedents dying in 2010 (the aggregate basis increase), plus an additional $3 million step-up for assets passing to a surviving spouse. Additional increases also may be available for a decedent's unused capital loss and net operating loss carryovers and certain built-in losses. Both halves of community property assets owned by the decedent qualify for allocation of the aggregate basis and the spousal basis increases.

Reporting Requirements

No estate lax returns will be required. Instead, the executor of a 2010 decedent's estate must allocate the available basis increases among the decedent's assets. For estates with a total asset value (other than cash) exceeding the $l.3 million aggregate basis increase, the allocation must be reported to the IRS on an as-yet unreleased form. Gift tax returns will still be required for gifts to any one individual in excess of the $13,000 annual exclusion.

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New Risks and Responsibilities

The administration of the estates of 2010 decedents under these new...