2010 Tax Relief Act: Important Elections for 2010 Decedents' Estates

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Under the federal tax laws in effect since 2001, the federal estate tax was repealed for estates of decedents who died in 2010 (“2010 Estates”) and the “stepped up basis” rules that previously resulted in avoidance of income (capital gains) tax liability on the pre-death appreciation of most assets were suspended. Suspension of the stepped-up basis rules meant that the assets of 2010 Estates would retain the decedent’s basis for income tax purposes (known as “carryover basis”) in calculating taxable gains when those assets are later sold. Special basis rules contained exceptions to the carryover basis which allow the executor of the decedent’s estate to step-up the basis of assets passing to beneficiaries other than the spouse by up to $1,300,000 and the basis of assets passing to the surviving spouse by up to $3,000,000. The election for this “limited stepped-up basis” was to be made no later than the filing deadline for the decedent’s final income tax return.

In the final weeks of 2010, the estate tax laws were modified by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”), which was signed into law on December 17, 2010. Some changes in the 2010 Tax Relief Act were made retroactively to specifically effect decedents who died in 2010. The new law provides 2010 Estates with an option: 1) the executor may (do nothing and) choose to accept the new federal estate tax rules for 2010 Estates; or 2) elect to accept the rules in effect prior to the 2010 Tax Relief Act.

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