Estate Return Rules for Individuals Who Died in 2010 – New Form 8939 and the affect on U.S. and Foreign Individuals

Wade Wilson, CPA

For individuals who died in 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) reinstated the U.S. estate tax.  Therefore, 2010 estates are subject to tax the same way estates of individuals who died prior to 2010 were taxed, except that the unified credit amount was increased to exempt a $5 million estate, instead of a $3.5 million estate as under prior law.   However, under the new law, executors can avoid estate tax by filing Form 8939 to make a “Section 1022 Election” and apply modified carryover basis.  The election is binding and must be made before January 17, 2012. 

Executors who choose to have the estate be subject to the estate tax and not make the Section 1022 election will file an estate return as in earlier years.  The beneficiaries of the estate will receive a full “step-up” in basis equal to the fair market value of the assets as of the date of death.  Due to the delay in determining the rules for 2010, the executor has until March 19, 2012 to file an estate return and receive relief from late filing or late payment penalties (for decedents dying before Dec. 17, 2010) and 15 months after the date of death to file and pay (for deaths occurring after December 16, 2010).

For executors of estates of U.S. individuals who make the Section 1022 election, the modified carryover basis allows the executor to take the decedent’s adjusted basis in the decedent’s assets and increase them by a total of $1.3 million.  Bequeaths to surviving spouses may be further increased by an additional $3 million.  For estates of nonresident decedents, the modified carryover basis is equal to the adjusted basis of the assets, plus an aggregate basis increase of $60,000, and a spousal property basis increase of $3 million.  It is important to remember that for each asset, the sum of the adjusted basis in the asset and the basis increase allocated to it may not exceed the fair market value of that asset on the decedent’s date of death.

The decision whether to file an estate return or elect out of estate tax and apply the modified carryover basis rules requires a comparison of the tax consequences of each scenario.  The executor must analyze the potential estate tax that will be due if an estate return is filed, and compare that with the amount of potential future tax savings lost because of a possibly reduced basis under the modified carryover basis rules.  We’ve already made these calculations for a number of clients and due to the uniqueness of each estate it is difficult to reach any general conclusions as to what an executor should do. 

As the U.S./German Estate Tax Treaty allows for a pro-rata unified credit amount based upon the percentage of the U.S. estate to the world-wide estate, for German individuals, we believe it may make sense to file a U.S. estate return in order to guarantee a higher basis to the heirs.  Since the unified credit amount was increased to exempt up to $5 million, the U.S. estate can represent a smaller percentage of the total estate and still offset a significant amount of U.S. tax.

For those foreign individuals who wouldn’t be subject to U.S. estate tax because the assets transferred are less than the $60,000 exemption amount, we see no significant benefit to either filing a U.S. tax return, or making the carryover election via Form 8939.