So, you’re an executor for someone who died in 2010. Be sure to mark your calendar for January 17, 2012. Why? That’s the new date by which you must now file a key federal tax form.
If your last name is "Steinbrenner," or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question.
Formerly, the deadline was November 15, 2011, only a couple weeks out. Yikes!
Good news: Now, the deadline has been extended out to January 17, 2012.
So, why is there even an "option" to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn"t any estate tax. The move was to offer a "retroactive" estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse.
Of course, practically speaking anyway, it still doesn't sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely upon the nature of the assets in the estate because of the "carryover basis" versus the "stepped-up basis" dilemma.
If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the "carryover basis" or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot "prove" an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the "stepped-up basis" or current market value when determining the capital gains tax owed.
More advice and information can be found in Deborah Jacobs’s recent article (as well as in an earlier New York Times piece), but so much depends on the particular assets and completeness of the recordkeeping regarding their basis.
Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won't pay taxes, but the rest may require some difficult calculations.
You can learn more about estate taxes on the Estate Tax Practice Center on our website.
Reference: Forbes (September 13, 2011) "IRS Extends Key Deadline for 2010 Heirs"