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Estate tax options for 2010 decedents

Given the popularity of The Walking Dead, it shouldn't be surprising that there's a lot of interest in the law dealing with the intersection of death and taxes.

Statistically, very few taxpayers are affected by the federal estate tax itself. Most estates aren't large enough to warrant IRS interest.

But even if an estate doesn't trigger collection (or in 2010, noncollection) of the tax, its heirs could end up owing depending on what they inherit and what they subsequently do with their bequests.

I'm again talking, of course, about the basis of property distributed after a loved one dies.

As blogged many times, most recently in Nudging mama off the train in two years?, the lack of an estate tax this year caused some tax problems for many folks. They were stuck with the carryover basis of the property they inherited, rather than being able to step up the basis to the value of the property upon the day the original owner died.

Under the Obama compromise, folks facing basis issues in connection with a 2010 estate now have a choice. As I noted in yesterday's post:

Where individuals have already passed away or do so in these final days of 2010, that person's estate has the option to apply the impending estate tax rules (35 percent tax rate and $5 million exemption with stepped-up basis) or to go with no estate tax but the carryover basis of the property left by the decedent.

Tax professionals (the good ones anyway), being the persnickety lot that they are, want to make sure. I've heard from some tax preparers wanting to double check that this is retroactive to all of 2010.

The issue arises because an estate tax return usually has to be filed within nine months of the date of death. For those who passed away early in 2010, that deadline has passed.

The answer to the retroactive nature of the choice provision is "yes."

Here's the exact legislative language:

(c) SPECIAL ELECTION WITH RESPECT TO ESTATES OF DECEDENTS DYING IN 2010.—Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary’s delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary’s delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.

(1) ESTATE TAX.—In the case of the estate of a decedent dying after December 31, 2009, and before the date of the enactment of this Act, the due date for—
(A) filing any return under section 6018 of the Internal Revenue Code of 1986 (including any election required to be made on such a return) as such section is in effect after the date of the enactment of this Act without regard to any election under subsection (c),
(B) making any payment of tax under chapter 11 of such Code, and
(C) making any disclaimer described in section 2518(b) of such Code of an interest in property passing by reason of the death of such decedent, shall not be earlier than the date which is 9 months after the date of the enactment of this Act.

Sorry to do that to you on a Sunday morning! In English, what that means is that the option to choose whether the 2010 or 2011 estate tax law applies is available to all 2010 estates, going back to the first day of this year.

And for estate tax professionals dealing with the official forms (and paying any due tax), you now have nine months from Dec. 17, 2010, the day Obama signed the bill into law, to deal with that paperwork.

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