New IRS Guidance for Opting Out of Estate Tax

For decedents dying and transfers made after December 31, 2009, Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, allows the executor of the decedent's estate to elect to apply the Internal Revenue Code as if the estate tax and step-up basis rules had not been enacted. Thus, instead of applying the new estate tax and step-up basis rules, the executor may elect to have the law, as enacted under the 2001 Tax Act, apply. If the election is made, the estate would not be subject to estate tax, and the basis of assets acquired from the decedent would be determined under the modified carryover basis rules of IRC Section 1022

The IRS has issued Notice 2011-66 which provides estates with guidance on how to opt out of the estate tax and have the carryover basis rules apply.  The election is made by filing a Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Generally, once made the election is irrevocable. The form must be filed on or before November 15, 2011. A Form 8939 filed prior to November 15, 2011 may be amended or revoked, but only on a subsequent Form 8939 filed on or before November 15, 2011. There will be no extensions of time to file. Notice 2011-66, § I.D.1.

On Form 8939 the executor is required to allocate basis increase as defined in Revenue Procedure 2011-41.  On the form the executor is also required to report the value of all property (excluding cash and property that constitutes the right to receive an item of income in respect of a decedent under IRC Section 691 (IRD)) acquired from the decedent.  Additionally, the executor must report all appreciated property acquired from the decedent, valued as of the decedent's date of death, that was required to be included on the donor's Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if such property was acquired by the decedent by gift or by inter vivos transfer for less than adequate and full consideration in money or money's worth during the 3-year period ending on the date of the decedent's death. Notice 2011-66, § I.B, C.

Within 30 days of filing Form 8939, the executor must provide a statement to each recipient acquiring property reported on that form, setting forth the information required under IRC Section 6018(c), regardless of whether the executor allocates Basis Increase to such property on the form.  Any adjustments to the basis of property reported on a Form 8939 must be reported in updated statements to each recipient of property affected by that adjustment within 30 days after making the adjustment or receiving notice of the adjustment from the IRS. Notice 2011-66, § I.C.

Note that Form 8939 is not currently available but the IRS website states that it will be made available soon.

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