Here we are on March 2, and yet the IRS is still befuddled about what the estates of decedents who died in 2010 need to do. This is mainly because Congress waited until December 2010 before enacting new rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes for 2010 (and only for the next two years), even though they had nearly ten years to come up with a permanent solution.
Unfortunately, as part of the solution, Congress has given the heirs of decedents who died in 2010 the choice between using the modified carryover rules that were supposed to apply to all 2010 estates or the retroactively reinstated estate tax rules. Are you kidding me? Giving heirs a choice means that they then have to actually make a choice, and we can only assume that a fair number will fail to make any choice at all. So which rules will be the default rules for 2010 estates? In other words, if a 2010 estate doesn't actively choose either set of rules, then which rules will apply to the estate by default?
This question was brought to my attention by El Centro, California estate planning attorney Vance McAlister. After several emails back and forth, we concluded that the only logical choice would be to make the estate tax rules the default rules. Why? Because if the modified carryover basis rules are used as the default rules, then each and every estate would have to file either a Form 706 or a Form 8939 to be able to receive a step up in basis of the estate's assets. On the other hand, if the estate tax rules are the default rules, then, as in prior years, the estates that are not required to file a Form 706 will still receive a step up in basis in the estate's assets without having to file Form 706 or Form 8939.
But as we all know, what is logical to us is not always what is logical to the IRS, because when Vance emailed several questions to the IRS, here is the response he received with regard to the 2010 default rules:
According to an IRS employee: "Unofficially ... for a decedent who died in 2010, the 2010 no estate tax law & modified carryover basis rules [should] automatically apply. The new law essentially provides a mechanism (by filing a Form 706) for making an election to use the 2011 estate tax law for the estate of a decedent who died in 2010."
This is, of course, one IRS employee's unofficial opinion, but it's really contrary to what makes sense. All I can say at this point is stay tuned for future updates.
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