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Julie Garber

To File Form 706, Form 8939, or Nothing at All, That is the Question

By March 2, 2011

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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.


  • Form 8939 - It's Official, It's Not Due on April 18
  • To File Form 706, Form 8939, or Nothing at All - The Sequel
  • Elusive IRS Form 8939 Not Due Until January 2012, and Other IRS Tales
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    March 2, 2011 at 10:46 am
    (1) Brian B says:

    It seems pretty clear to me that the default is the new estate tax rules with an election into the carry over basis rule.

    Section 301(a) of the 2010 Tax Relief Act amends the IRC to read as if EGTRRA had never been enacted. Section 301(c) allows estates of decedents dying between Dec. 31, 2009 and Jan. 1, 2011 to elect to apply the code as if EGTRRA were still in place.

    So the default is an estate tax with the $5,000,000 exemption and 35% rate. The only thing that does not apply in 2010 is portability.

    March 3, 2011 at 11:28 am
    (2) David E. says:

    The IRS updated their Q&A on 2010 estate tax rules on Feb 22, 2011, and indeed stated that the new Estate Tax rules would be the default for 2010, with executors having to make a timely election for carry-over basis and no estate tax (and an as yet unavailable Form 8939). Search for “executor 2010″ on the IRS website for the information.

    March 10, 2011 at 2:01 pm
    (3) Mike says:

    My Dad died in 2010 with about 500,000 dollars in stock and mutual stock funds. His assets were held in a termininable living trust with A B type trust arrangement. My parents were Co Trustees of the trust. (my mother also has a separate trust.

    Dad funded his trust, but did not establish a cost basis for the transferred assets, and I was never able to locate his stock and mutual fund transaction records.

    Dad’s trust assets were transferred to my Mothers trust instead of in to the contemplated bypass trust.

    It looks like we do not need to file an estate return for my father’s . Do the transferred assets from my Dad to my Mom receive a step up basis equal to their FMV on the Date of his death? Do I need to file anything with IRS to establish FMV basis?

    March 14, 2011 at 3:50 pm
    (4) Jerry says:

    It appears that I should file a 706 even though my mother’s (who died in August 2010) estate was valued at under $300,000 in order to set step up basis numbers for the property.

    March 14, 2011 at 8:26 pm
    (5) Mike says:

    As noted above in comment 3, my father died in 2010 and transferred 500,000 dollars in stock and mutual funds to my mother. I have decided not to file anything with the IRS, after looking over a lot of conflicting and sometimes unclear information on the internet. I printed out the account values for my father’s stocks as of the date of death (closing values)

    I am keeping the print out on file and using the account values as the cost basis for the stocks my mother inherited.
    I don’t see why it would be necessary to file anything with the IRS.

    March 15, 2011 at 12:18 pm
    (6) Mike says:

    I am not sure how this forum works so this comment may repeat what I tried to post yesterday.

    My question and comment goes to the issue of estates of those who die in 2010 with no federal estate tax due. Why should it be necessary to file 706 form just to establish the basis of inherited assets? I have established the FMV of stocks and mutual funds in the estate by printing out a statement for the assets from Vanguard trust account as of date of death. Shouldn’t this suffice if the IRS ever questions the basis of these assets?

    March 30, 2011 at 2:18 pm
    (7) troy says:

    I was the court appointed conservator of my father, and trustee of his revocable trust that had a house as the only asset.

    After his death, the house was sold to pay off legal and other debts with nothing going out to beneficiaries of the trust. A court order determined the distribution from the proceeds of the sale.

    The question is…Do I need to file a tax return for the trust, since there was no gain, and nothing distributed to anyone beyond the specified creditors. My attorney says we do not, but he doesn’t sound 100% sure.

    April 3, 2011 at 11:20 am
    (8) Brooke B. says:

    Direct quote from IRS Publication 559:

    “Public Law 111-312, Act section 301:

    1. Reinstated the estate tax for 2010,

    2. Repealed the modified carryover of basis rules of section 1022 for property acquired from a decedent who died in 2010, and

    3. Created a special election that elects out of the estate tax rules for 2010 and uses the modified carryover of basis rules (section 1022) for property acquired from a decedent dying in 2010.

    If the special election is not made, the rules for determining basis of property acquired from a decedent who died in 2010 are the same as the rules for property acquired from a decedent who died in 2008 or 2009.”

    I think this is crystal clear. Modified carryover basis was repealed, meaning the default is the step up in basis to FMV. A special election is necessary to get the modified carryover basis.

    April 3, 2011 at 12:40 pm
    (9) Julie Ann Garber, Esq. says:

    Hi Brooke, thank you for this information. Publication 559 was last updated on March 15 and the original blog was written on March 2, so apparently the information you quoted was part of the update.

    Best regards,

    Julie Ann Garber, Esq.
    Your Guide to Wills & Estate Planning
    email: wills.guide@about.com

    April 20, 2011 at 5:22 pm
    (10) ORLY? says:

    Comment (1) is dead on. It was crystal clear from the new laws as enacted what the rules would be. Article was at best irresponsible. Cop out that 559 was not updated until March 15. All you had to do was actually read the legislation. Evidently you read a summary and were confused.

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