More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Estates of decedents who died in 2010 finally have guidance from the IRS on how to opt out of estate tax treatment and allocate carryover basis to estate property. The guidance is long overdue, and leaves little time for estates to make decisions that could have a massive tax impact.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made the estate tax inapplicable to the estates of decedents dying in 2010. But Congress retroactively reinstated the estate tax for 2010 as part of last year’s Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. Under the act, an executor of a 2010 estate can opt out of the estate tax. Estates that opt out of the tax are subject to carryover basis instead of the typical step-up basis for estates of decedents dying in years other than 2010.
Under the guidance, Notice 2011-66, to opt out of the estate tax and apply the new carryover basis rules, an executor must file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. The due date for the form is Nov. 15, 2011. But despite the November deadline, Form 8939 and its instructions will not be available until early this fall. The IRS has, however, released a draft version of the form.
The opt-out election is irrevocable once the deadline passes—although amendments may be submitted prior to its due date. If multiple versions of the form are submitted prior to the due date, the last Form 8939 submitted by an executor prior to the due date will be operative. However, a subsequent executor’s Form 8939 will not affect a Form 8939 filed by a different executor.
The IRS will not grant extensions of time to file Form 8939 and, in general, will not accept an amended form after the due date. There are some exceptions to the no amendment rule. For example, an amended Form 8939 may be filed after the due date for the sole purpose of allocating spousal property basis increase.
An executor is not permitted to file an estate tax return for 2010 and simultaneously file a conditional Form 8939 that would take effect only if an estate tax audit results in an increase in the gross estate above the applicable exclusion amount. As a result, the decision whether to opt out of the estate tax for estates of around $5 million requires significant research and contingency planning.
But don’t forget that the $5 million exclusion amount is not a magic economic breakpoint for opting out of the estate tax. Because of the carryover basis rules applicable when an estate opts out of the estate tax, estates that exceed $5 million by even a significant margin may be best served by not opting out of estate tax treatment.
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