Diane L. Mutolo on the Reinstated Estate Tax’s Effect on Basis Rules and Estates of 2010 Decedents

The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 reinstated the estate tax and stepped-up basis rules and repealed the modified carryover basis rules for the estates of decedents dying in 2010. In this Emerging Issues Analysis, Diane L. Mutolo discusses the return of the estate tax, the stepped-up basis and modified carryover basis rules, and the special election under the Act to not have the estate tax apply in 2010. She writes:

     Stepped-Up Basis Rules. As a result of the repeal of the modified carryover basis rules under IRC Section 1022, the "stepped-up basis" or fair-market- value-on-date-of-death rules under IRC Section 1014 will apply to decedents dying in 2010 unless a special election, discussed further below, is made.

     Under IRC Section 1014(a)(1), the basis of property in the hands of the person acquiring the property from a decedent or to whom the property passed from a decedent is the fair market value of the property at the date of the decedent's death. In addition, under IRC Section 1014(a)(2), if an alternate valuation is elected under either IRC Section 2032 or IRC Section 811(j), the basis of the property acquired from the decedent is determined as of the alternate valuation date. As explained in How to Save Time & Taxes Preparing Fiduciary Income Tax Returns, "[a]n alternate evaluation date election means that if the property acquired from the decedent is disposed of within six months of the decedent's death, its basis is its fair market value on the date of disposition. If the property is held for at least six months after the decedent's date of death, its basis is its fair market value on the date six months after the decedent's date of death." Under IRC Section 1014(a)(3), an election can be made with respect to farm or business property for the basis of such property to be its special use value. Furthermore, under IRC Section 1014(a)(4), to the extent of the applicability of the exclusion from the gross estate for land subject to a qualified conservation easement, the basis for the property is the basis in the hands of decedent.

     IRC Section 1014(b) identifies the categories of property that will be considered to have been acquired from or to have passed from the decedent. The categories, as described in How to Save Time & Taxes Preparing Fiduciary Income Tax Returns, are the following:

"(1) Property passing by will or through local intestacy laws from the decedent to his estate regardless of the decedent's date of death.

(2) Property transferred by the decedent to a revocable trust with income payable to himself or to whomever he directed as long as he lived; or (for post-1951 decedents) transfers to any trust if the decedent retained a power at all times prior to his death to control enjoyment of the property through a power to alter, amend or terminate the trust.

(3) Property passing for less than full and adequate consideration by decedent's exercise in his will of a general power of appointment. ...

(footnotes omitted)

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