IRS has released a revised Form 706 for use by estates of decedents dying after December 31, 2008 and before January 1, 2010. Changes reflected in the revision include some law and indexing changes. The revision makes no mention of next year’s scheduled repeal of the estate tax.
Items reflected on the revised form. The instructions stress that this revision is to be used only for decedents dying in calendar year 2009. They also note these changes:
- The applicable exclusion amount for estates of decedents dying in calendar year 2009 is $3.5 million.
- Various dollar amounts and limitations relevant to Form 706 are indexed for inflation. For decedents dying in 2009, the following amounts have increased: (a) the ceiling on special-use valuation is $1 million; and (b) the amount used in computing the 2% portion of estate tax payable in installments is $1.33 million. IRS says it will publish amounts for future years in an annual revenue procedure.
Reminder. The instructions also point out that, in 2008, IRS added a worksheet to help executors figure how much of the estate tax may be paid in installments under Code Sec. 6166.
Which estates must file. For decedents dying in 2009, Form 706 must be filed by the executor for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $3.5 million.
Looking ahead. The instructions do not mention that the estate tax is scheduled to be repealed for estates of decedents dying in 2010. The current transfer tax rules are in a state of flux as a result of changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Act) that have been gradually implemented. To comply with budgetary rules, the 2001 Act contained a so-called “sunset rule” under which the pre-2001 Act rules return after 2010 unless Congress provides otherwise at some future time.
Under pre-2001 Act law, there was no gift tax and no estate tax on the first $675,000 of combined transfers during life or at death, for gifts made and individuals dying in 2001. These two taxes were tied together under a unified system having a top rate of 55%. However, there were and still are differences between the gift tax and the estate tax. One difference potentially affected the income tax of donees (recipients) of gifts and heirs of estates. A donee generally gets the donor’s basis (usually cost) for a gift. As a result of this carryover basis, if there is a gift of appreciated stock, for example, the donee will have a taxable gain if he sells at the gift value. Property acquired from a decedent, however, generally gets a basis equal to its value at his death. This means that, on a later sale by the heir, he won’t have to pay income tax on the appreciation in the property that occurred while it was held by the decedent.
The 2001 Act substantially increased the $675,000 exemption in stages after 2001. For individuals dying in 2006 through 2008, the exemption was $2 million. It rose to $3.5 million for individuals dying in 2009.
The 2001 Act also changed the unified system so that the gift tax exemption amount remained at $1 million for all years after 2001; the gift tax is not being repealed during 2010 as is the estate tax. Under the “sunset rule,” the exemption will be $1 million for both estate and gift tax purposes in 2011.
Under the 2001 Act, the top estate and gift tax rate was reduced in stages. It was 46% for individuals dying and gifts made in 2006, and it dropped to 45% for transfers in 2007 through 2009. In 2010, there will be no estate tax and the top gift tax rate will be 35%. The top estate and gift tax rate reverts to 55% in 2011.
When the estate tax is repealed in 2010, the basis rules will be changed to be similar to the gift tax rules but with many opportunities for heirs to get increases in basis. For example, it will be possible to increase the basis of assets received from an individual dying in 2010 by $1.3 million and by an additional $3 million for assets going to a spouse. Under the sunset rule, the pre-2001 Act step-up in basis rules return for 2011.
The question is whether estate tax repeal for 2010 is even going to occur. Most commentators feel that Congress is going to undo the repeal. Any move in that direction will have to occur before the end of 2009 to avoid constitutional challenges that surely would result if estate tax repeal were eliminated after it took effect. Given the short time to act, the mostly likely scenario would be for Congress to keep the exemption at the $3.5 million level for 2010 while it ponders a more permanent solution, which could involve a reunification of estate and gift taxes.
If the repeal is undone, it will be costly for heirs of individuals dying in 2010 with very large estates. However, heirs of many smaller estates may come out better if the repeal is undone and a step-up in basis is preserved. For example, assume a single individual has an estate worth $3.5 million and having a basis of $1.2 million. If estate tax repeal is preserved and he dies next year, there would be no estate tax. But his heirs would face income tax on $1 million worth of assets when they sell them. This is the $3.5 million they inherit less a basis of $2.5 million (the individual’s original $1.2 million basis as increased by $1.3 million under the carryover basis rules). On the other hand, if the current rules are retained for next year, there would still be no estate tax and the heirs would face no income tax on any pre-death appreciation. Of course, these results would be impacted by state death taxes, if any, plus estate administration costs and other estate expenses, which, for the sake of simplicity, were ignored in the foregoing comparison
Click here for the revised Form 706.
Click here for the Instructions for Form 706.
For more information on the state of the federal estate tax or to discuss your particular situation, please contact Moore McLaughlin, Esq. by e-mail at mmclaughlin@mclaughlinquinn.com or Jill E. Sugarman, Esq. by e-mail at jsugarman@mclaughlinquinn.com.
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