Taxes and the Decedent s Estate 2010 A Year of Change. A New Start

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1 Taxes and the Decedent s Estate 2010 A Year of Change Rebecca A. Pace, CPA Estate Accountant Vorys, Sater, Seymour and Pease LLP RAPace@vorys.com A New Start January 1, 2010, Federal Estate Tax Repealed Step-Up Basis Replaced by I.R.C Modified Carry-over Basis What is basis? Allocation of basis increase Basis Reporting 3 May 17,

2 Changes Continue Ohio Still $338,333 Federal Changes again Jan.1, 2011 Possible dual methods for The Way It Was Estate Tax on Value Exemption Credit Marital Deduction 5 May 17,

3 Who Paid? One-quarter of 1% subject to tax /2011 Tax Rates Taxable amount over Taxable amount not over Tax on amount in Column A Rate of tax on excess over A 1 million 1.25 million 345,800 41% 1.25 million 1.5 million 448,300 43% 1.5 million 2.0 million 555,800 45% 2 million 2.5 million 780,800 49% 2.5 million 3 million 1,105,800 53% 3 million 1,290,800 55% 7 May 17,

Examples Sold before death Fair Market Value $500,000 Original Cost (Basis) $450,000 Capital Gain $ 50,000 15% Tax (20% in 2011) Tax $ 7,500 Sold before death

4 Step-Up in Basis Sold before death Fair Market Value $500,000 Original Cost (Basis) $ 2,000 Capital Gain $498,000 15% Tax (20% in 2011) Tax $ 74,700 Sold after death Date of Death Value $500,000 Ohio Estate Tax $9,700 (6%/7% tax) Sold for $500,000 Stepped-Up Basis $500,000 Capital Gain -0- Savings: $65,000 8 Basis Examples Sold before death Fair Market Value $500,000 Original Cost (Basis) $450,000 Capital Gain $ 50,000 15% Tax (20% in 2011) Tax $ 7,500 Sold before death Fair Market Value $500,000 Original Cost (Basis) $550,000 Capital Loss $ (50,000) Limited to $3,000 per year Can offset gains 15% Tax (20% in 2011) 9 May 17,

5 2010 Carryover Basis I.R.C. 1022(a) $1,300,000 Threshold The recipient of property acquired from a decedent receives a basis of the lesser of the decedent s adjusted basis or the Fair Market Value of the property on the Date of Death. 10 Fair Market Value (FMV) Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. 11 May 17,

Simple Basis What you paid Cost of improvements Less depreciation 12 Basis of Business Interests Initial Contributed Capital $50,000 Losses -$15,000 Basis End of Year 1/Beg Year 2 $35,000

6 Simple Basis What you paid Cost of improvements Less depreciation 12 Basis of Business Interests Initial Contributed Capital $50,000 Losses -$15,000 Basis End of Year 1/Beg Year 2 $35,000 Year 2 Loans Payable (At Risk) $5,000 Losses -$45,000 Basis End of Year 2/Beg Year 3 -$5,000 Income $20,000 Owner s Withdrawal -$7,000 Basis End of Year 3/Beg Year 4 $8, May 17,

7 General Basis Increase and Spousal Basis Increase General Basis Increase 1022(b) $1.3 million Spousal Basis Increase 1022(c) $3.0 million Nonresident, Non-US Citizen $60,000 limit 14 Example 1 Unmarried Decedent FMV Basis Allocated Increase Brokerage 2,000,000 1,000,000 1,000,000 account House 250, , , May 17,

Other Basis Increases and Exclusions 1212(b) Capital loss carryover 172 Net operating loss carryover 165 Built-in business theft losses 16 Foreign Interests No basis increase is permitted for certain

8 Other Basis Increases and Exclusions 1212(b) Capital loss carryover 172 Net operating loss carryover 165 Built-in business theft losses 16 Foreign Interests No basis increase is permitted for certain assets ( 1022 (d)(1)(d)) (i) Stock or securities of a foreign personal holding company (ii) Stock of a DISC or former DISC (iii) Stock of a foreign investment company, or (iv) Stock of a passive foreign investment company, with some exceptions. 17 May 17,

9 Using the Personal Residence Exclusion Unmarried Decedent FMV Basis Allocated Increase Brokerage 5,000,000 3,000,000 1,300,000 account House* 250, ,000 none *May qualify for 121 Exclusion of gain on sale of personal residence up to $250, Owned by and Acquired from Eligible Owned Directly or Held by Revocable Trust Questionable or Ineligible Review these with an attorney Subject to Power of Appointment Review terms of QTIP at second death GRAT / QPRT 1022 (c)(5)(b)(ii) and (d)(1)(b)(iii) 19 May 17,

10 Gifts Life estates may be ineligible review documents Gifts within 3 years of death ineligible - I.R.C. 1022(d)(1)(C) unless received from the spouse 20 Income in Respect to a Decedent No increase is permitted for IRD assets. Married All to Spouse FMV Basis Allocated Increase IRA 2,000, Cash 100, ,000 0 House* 250, ,000??? *Residence may be qualified for exclusion of gain 21 May 17,

Executor ~ Personal Representative Fiduciary responsibility to beneficiaries Allocation

11 Negative Basis 1022(g)(2) (Negative Basis) Ordinary income on sale If transferred to taxexempt entity, immediately taxed to estate 22 Role of the Executor 1022(d)(3) Executor ~ Personal Representative Fiduciary responsibility to beneficiaries Allocation ~ Asset by Asset Increased basis cannot exceed FMV OK to allocate increase to self 23 May 17,

12 Allocation for Unmarried Person Beneficiary Basis of Allocated Modified Taxable Beneficiary Asset FMV Increase Basis Gain on Received Sale A 700,000 1,000, ,000 1,000,000 0 B 800,000 1,300, ,000 1,200, ,000 C 900,000 1,300, ,000 1,300,000 0 D 1,400, , ,000 0 E 700,000 1,000, , , , Allocation with Surviving Spouse Beneficiary Beneficiary Basis of Allocated Modified Taxable Asset FMV Increase Basis Gain on Received Sale Surviving 700,000 1,000, ,000 1,000,000 0 Spouse B 800,000 1,300, ,000 1,300,000 0 C 900,000 1,500, ,000 1,400, ,000 D 1,400, , ,000 0 E 700,000 1,000, ,000 1,000, May 17,

13 Conflicting Interests $1.3 million General Increase $195,000 $3.0 million Spousal Increase $450,000 $1.3 million General Increase (2 nd death) $195,000 at 15% capital gains rate $840, capital gains rate = 20% 26 Reporting Requirements Estate over $1.3 million Statement to beneficiaries within 30 days of filing tax return $10,000 penalty (IRC 6716) 27 May 17,

Tax Report Requirements A schedule attached to the decedent s final 1040. Due April 15 of the year following death, subject to extensions. Include a description of the property.

14 Tax Report Requirements A schedule attached to the decedent s final Due April 15 of the year following death, subject to extensions. Include a description of the property. Show both the adjusted basis of the property in the hands of the decedent and the fair market value on the date of death. 28 Holding Period Report the holding period for the property Generally the date the property was acquired Not automatic long-term property Decedent s holding period tacked on 29 May 17,

Character of Income Report the amount of basis increase allocated to the asset Indicate ordinary income component Building & Equip 900,000 Land 100,000 Total 1,000,000 Less

15 Character of Income Report the amount of basis increase allocated to the asset Indicate ordinary income component Building & Equip 900,000 Land 100,000 Total 1,000,000 Less Depreciation Standard Depreciation 800, ,000 Adjusted Basis 100, Business Interests Professional advisors Tax returns Insurance inventories Personal records 31 May 17,

16 Securities Investment account transcripts Reinvested dividends HR department Transfer agent Physical stock certificate Yahoo! Finance 32 The Hunt for Basis Estate Tax Returns Probate Records County Recorder County Auditor Codes and Permits Photographs 33 May 17,

17 The Challenge 34 Rebecca A. Pace, CPA Estate Accountant Vorys, Sater, Seymour and Pease LLP May 17,

Print/Type preparer s name Preparer s signature Date Check if PTIN self-employed

Print/Type preparer s name Preparer s signature Date Check if PTIN self-employed Form 8939 Department of the Treasury Internal Revenue Service Allocation of Increase in Basis for Property Acquired From a Decedent File separately. Do NOT file with Form 1040. See below for filing address.