Thursday, September 23, 2010

To File or Not to File: Is it Necessary to File a Federal Estate Tax Return This Year?

We are now nine months into 2010 and many of the same questions facing estate planners and their client earlier this year in January are still unanswered.

Will we see estate tax legislation prior to 2011 preventing a return to a pre-EGTRRA tax regime?

Will that legislation affect the current estate tax environment and provide for the retroactive installment of an estate tax?

How do I handle this carryover basis business?

What federal estate tax form should be filed for persons dying during 2010?

Thus, with these and other unanswered quizzical queries floating around the estate tax world, what’s an estate planner to say at the next neighborhood BBQ when his/her clients, tax preparing colleagues, and/or the throngs of interested parties and neighborhood children are almost certain to ask if a 706 needs to be filed during 2010? Unfortunately, as far as we can tell, these and many similar questions are no closer to being answered today than they were at the beginning of the year. And with a pivotal election season on the horizon, it’s unlikely we’ll see any resolution on the estate tax front before November. That being said, there are some hints of guidance and forthcoming information in the area of estate tax return compliance which we are wont to share with you, our readers, as expressed below:

First, Internal Revenue Code Section 6075 addresses the time for filing an estate tax return. Section 6075 states that those required to file estate tax returns are required to do so by the due date on which the final federal income tax return the decedent would have filed, i.e. April 15, 2011. At this point, you might be saying, “That’s great! But, on what form do I report the pertinent information, and how do I file it, seeing as how there is no IRS Form 706, United States Estate (and Generation- Skipping Transfer ) Tax Return for 2010 available?” To which I would reply, “See my second point below.”

Second, the word on the street is that the IRS will not be releasing a traditional Form 706 for 2010. Rather, the Service will be providing a new type of return meant to address the carryover basis provision of the 2010 estate tax law as well as the accompanying allocation of stepped-up basis allowances ($1.3 million to anyone and $3 million going to a spouse or QTIP-like trust) feature. Apparently the new return will require that within 30 days of its due date, each person receiving property as part of the administration of the trust/estate is to receive the basis information being reported on the return. Additional information from the IRS supports the rumor that the death of the 706 for 2010 is not exaggerated seeing as how an attorney for the IRS (Patrick Leahy) publicly stated that it is not necessary to file a Form 706 this year and that if one is filed, it will be returned to the party that filed the form. Consequently, in an estate tax world of many uncertainties, at least three things are quite certain: (1) The IRS will provide a mechanism to report the allocation of stepped-up basis on inherited assets for 2010; (2) the tracking of this basis will likely be the bane of many a CPA’s existence for years to come; and (3) whatever you do, don’t file a Form 706 for 2010.

Third, if new estate tax legislation is not put in place in the near future, the estate tax regime formerly known as a “55% rate and a $1 million exemption”s will be making an encore appearance come 2011. In the event of such an occurrence, rest assured, one more thing is relatively certain: enough federal estate tax returns will be filed for deaths taking place in 2011 to more than make up for the dearth of such filings this year.

Fourth, plan accordingly.

 - Attorney Jeremy Cooper

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