Friday, June 3, 2011

Estate Tax Still in Limbo

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It is almost nine months since the repeal of the federal estate tax took effect, and the chances of timely Congressional action to reinstate it appear slimmer each day.  Although Congress will be reconvening for an abbreviated session before the November 2 election, it is unlikely that either house will want a vote on such a controversial issue before the election. 

This situation leaves estates of decedents who died in 2010 in a quandary. Estates of those who died in early 2010 will soon be coming up on the nine-month filing deadline for a Form 706 estate tax return that no longer exists. Should they assume that the estate tax will be reenacted retroactively?  If so, they need to prepare a mock federal estate tax return so that they can determine how much tax will be due in a worst-case scenario.   

But how far should the estate go in its post-mortem planning?  Some estate plans depend upon disclaimer-based planning, giving the surviving spouse the right to disclaim property into a credit shelter trust. With the nine-month deadline for qualified disclaimers looming, the advisors to the estate need to determine the effect of such disclaimers, both with and without an estate tax. 

Even without an estate tax, appraisals of hard-to-value property remain important. The carryover basis rules of IRC §1022, which are now in effect, make it difficult to avoid an appraisal of such assets. Under §1022(a), the carryover basis of inherited property is the lesser of its adjusted basis in the hands of the decedent or its fair market value at death.  Without an appraisal, the IRS may argue on examination that the date of death value was less than the decedent’s adjusted basis. The executor will also need an appraisal to allocate the estate’s $1.3 and $3.0 million basis increases under §1022(b) and (c). Without knowing the precise value of the inherited property, it will be troublesome to allocate basis to it. 

Harold W. Pskowski, Managing Editor (Estates, Gifts and Trusts) 

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