As most everyone knows by now, there is no estate tax due on the estates of persons who die in 2010, no matter how large the estate. This is certainly good news for the family of George Steinbrenner and the families of the other 7,000 or so decedent estates that would have been affected by the estate tax law in 2010. George Steinbrenner died on July 13, 2010 and it is estimated that his family saved about $500 million because of the lapse in the federal estate tax. However, the lapse of the estate tax is potentially bad news for the more than 70,000 decedent estates affected by the loss of “stepped-up” basis in 2010.
For many years prior to 2010, the income tax basis of inherited assets “stepped-up” to the fair market value of the assets on the decedent’s date of death. If Granddad purchased the family farm in 1950 for $30,000 and it was worth $330,000 in the year of his death, his beneficiaries acquired a new income tax basis in the farm equal to the $330,000 fair market value at Granddad’s date of death. If the beneficiaries sold the farm for its fair market value, they would not recognize any gain and would avoid income tax liability on the sale. That was the rule until this year when the rules changed.
The stepped-up basis provisions do not apply in 2010. Accordingly, Granddad’s beneficiaries’ basis in the family farm will be $30,000, the same as Granddad’s basis. Granddad’s basis “carries over” and becomes the beneficiaries’ basis. Thus, if the beneficiaries sell the family farm for $330,000, they would have a taxable gain of $300,000. There may be a silver lining however.
According to the new law for 2010, the initial basis of decedent’s property at death can be increased in the total amount of $1.3 million. Returning to the family farm example, the personal representative (PR) of Granddad’s estate is required to file Granddad’s final income tax return which is due April 15, 2011. As part of that final return, the PR can include the IRS form for allocating the basis increase, and allocate $300,000 of the $1.3 million basis adjustment to the family farm, thereby increasing the basis of the farm to $330,000, the fair market value at Granddad’s death.
Upon sale of the family farm by the beneficiaries, they will only have taxable income if the farm is sold for an amount in excess of $330,000. In addition, the personal representative still has $1 million of basis increase available to allocate to other assets in Granddad’s estate.
In addition to the initial basis increase discussed above, there is an additional $3 million basis increase which can be utilized to increase the basis of assets transferred from a decedent to his or her surviving spouse. As a result, there is a total potential of $4.3 million in basis increase available.
This amount of basis increase should take care of the majority of folks, even if not the George Steinbrenner family. However, if the final tax return of the decedent with the allocation of basis adjustments is not timely filed, there is no allocation and no basis adjustment. If you are the beneficiary of assets from the estate or trust of someone who died in 2010, you should consult with your tax advisor well before April 15, 2011 to be sure that the basis allocation is handled properly.
Doug Nickell is an attorney with Lathrop & Gage in Springfield, Mo.
