Jun 1, 2011 12:00 PM

When the right choice for one isn't the right choice for another

By Jaclyn S. O'Leary

The 2010 Tax Act answered many questions that lingered in practitioners' minds throughout 2010. At the same time, the 2010 Tax Act presented a new question for practitioners: How do we advise executors of estates of 2010 decedents on whether to accept the default $5 million exclusion amount with a 35 percent tax rate or opt out of the estate tax and apply the modified carryover basis regime? When the gross estate is valued at under $5 million, the answer may often be simple — apply the default rule, utilize the $5 million exemption and receive a step-up in basis in all the assets. It's those estates that exceed $5 million that present a dilemma.

For example, we represented the executor of an estate valued at $7 million, which was comprised primarily of rental real estate with a zero tax basis. The decedent was a widower and left his estate to multiple beneficiaries. Although opting out of the estate tax was initially appealing, opting out wasn't a quick or easy decision because of the basis issue. Ultimately, the executor decided to pay an estate tax. As a result, the zero-basis assets received a step-up in basis to the fair market value at the date of death and the rental real estate can be newly depreciated for income tax purposes, thereby lowering the beneficiaries' annual income tax burden. Furthermore, depending on how soon a sale of real estate occurs after the decedent's death, the capital gains tax will be lower than if the basis in the property remained near zero. In reaching this decision, we and the executor examined the effects of the modified carryover basis rules under Internal Revenue Code Section 1022, which allowed for only $1.3 million of basis to allocate. We agonized over the best method of allocation that would be both tax efficient and fair to all beneficiaries. In addition, we considered factors like the beneficiaries' intent regarding future sales, their ability to manage the properties productively, the projected increase in the value of assets and the additional recordkeeping for state and federal income tax purposes. In the end, paying an estate tax was the more favorable option, but that's not always the case.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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