The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also known as the Tax Relief Act of 2010, was signed by the President on December 17, 2010. For those of us interested in estate and gift taxes, we learned right away that this Act provides significant estate and gift tax relief by increasing the federal applicable exemption amount and Generation Skipping Transfer Tax (GST) exemption to $5 million and by increasing the lifetime gift tax exemption as well to $5 million for two years for decedents dying after December 31, 2010. Hurray! But also, ho hum, because this is the same unified estate and gift tax system that we had many years ago, just with bigger numbers. Because these numbers are so large, they really impact only those who have very large estates, for example, a married couple with an estate of more than $10 million.
But Oh! There are some new things in the Act that may affect others who were not as rich! One of those is an election to go back into 2010. For those folks who are the beneficiaries of decedents who died in 2010, this Act causes us to take another look at those estates. The federal estate tax was repealed in 2010. Therefore, for decedents who died in 2010, there was no federal estate tax liability and no federal estate tax returns that needed to be filed. Yippee many said. But there was also no step-up in basis for all appreciated assets and no GST exemption to be allocated. Oh, bummer. If you inherited appreciated assets from a decedent who died in 2010, and then sold them, you the beneficiary had to pay capital gains tax on the gain realized, using the original basis of the decedent, whatever that was. But wait, there was an exception. You could allocate a new stepped-up basis to some of the assets, up to $1.3 million. So if you inherited $2 million, you could pick which assets to which you wanted to assign a new basis, that is, the value as of the decedent’s date of death. How do you do that? On a new form (which was issued, then retracted by the IRS in 2010) soon to be available, which you attach to the final 1040 of the decedent.
The Act does not undo the repeal of the federal estate tax for 2010, but it does allow an election. Ho Ho Ho!!! Even though there was no federal estate tax in 2010, if a decedent died in 2010, no matter how large or small the estate was, the personal representative of the estate can now choose to treat the estate of the decedent as if the federal estate tax was in effect in 2010, applying the $5 million exemption in 2010 and obtaining the step-up in basis for all appreciated assets. Soooo, ho ho ho, if the total estate of the decedent who died in 2010 was $2 million, the personal representative can elect in 2011 to go back and treat the estate as taxable, without paying any tax, because the value is below $5 million, but obtain the step-up in basis of all of the assets without having to pick out some of the assets for the step-up but not all. The GST exemption is now available to the estate so that GST exemption can be allocated to inherited assets. Finally, for an estate of a decedent who died in 2010, if the estate is larger than $5 million and if the estate elects to file a federal estate tax return for 2010, the deadline for filing is September 17, 2011, nine months after the Act was signed, rather than nine months after the date of death.
The IRS is to determine the time and manner for making the election. Oh, the anticipation of the Christmas season!!! Ho ho ho.