Thoughts on the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA-2010)"
706 2010 Tax Year
The TRA-2010 reinstates the Federal Estate and GST taxes. The TRA-2010 also provides for an election to opt out the Estate Tax for 2010 and have the estate use the Carryover basis rules contained in 2001-EGTRRA.
Taxable estates greater than the basic exclusion amount of 5 million dollars would in all likelihood opt out of the estate tax for 2010 and comply with the Carryover basis rules of Section 1022 and the reporting requirements of Section 6018.
However before that decision can be made an analysis would have to be made as to which option would provide the lowest tax impact. For example a taxable estate of 6 million dollars for 2010 would generate a net Federal Estate Tax of $350,000 after application of the basic exclusion of 5 million dollars. The estate would opt out of the Federal estate Tax if the capital gains tax incurred using the Carryover basis rules would be less than $350,000.
The capital gains tax in the example would equate to the Federal Estate Tax if the inherent gain was $2,333,333 and the capital gain rate was 15%. If the potential capital gain was greater the $2,333,333 then the estate would not opt out of the estatetax. Of course there are other factors such as when the assets would be sold and the time value of money to be considered.
Our 2010 706 with its Carryover basis capability can enable a user to make this analysis. This capability is important even in estates in the 5 million and under range where Carryover basis versus Estate Tax would not be an issue,
Filing the 706 in smaller estates is a good way to have a paper trail to establish the income tax basis of assets which will have as their tax basis the date of death value or alternate value. In addition filing the return starts the statute of limitations running. This is beneficial when there are questions regarding the method used in valuing certain assets.
There are also technical GST reasons for filing even though the GST tax rate for 2010 is zero.
706 2011-2012 Tax Years
The Carryover Basis versus Federal Estate Tax issue isn't a factor for 2011 and 2012. However the TRA-2010 introduces a new concept - portability of the Estate Tax exemption between spouses. This new concept could actually increase the number of 706 necessary to be filed. The TRA-2010 requires that the estate of the deceased spouse file a 706 and make an election on that 706 allowing the surviving spouse to use any unused exemption of the predeceased spouse. We also believe that a computation of the unused amount will have to be attached to the 706.
This means that even estates that would not have been required to file under the old 3.5 million exemption will have to file a 706 if they wish to have the surviving spouse take advantage of any unused exemption amount.
Even if the portability of the exemption is not an issue the concepts stated above for 2010 smaller estates would also apply in 2011 and 2012.
709 2010-2012 Tax Years
The TRA-2010 should have no impact on 2010 Form 709 filings. The increase in the gift tax and GST exemptions to 5 million for the years 2011 and 2012 will have no detrimental impact on 709 filings as the requirement for filing a 709 is based on whether or not a taxable gift has been made at the donee level.
In fact for the years 2011 and 2012 the TRA-2010 could possibly foster additional Form 709 filings. The reason for this would be the increase in the gift tax and GST exemption. Donors who have used up their previous 1 million exemption now have an additional 4 million exemption to offset new gifts.
Fiduciary Income Tax Form 1041
The act does not have any significant impact on the Fiduciary Income tax area. It's possible that if as stated above the act fosters additional gift giving in the form of trusts then the TRA-2010 could result in more 1041's being filed.
