2010 – The Year of Carryover Basis
by Letha Sgritta McDowell
February 5, 2010
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The last issue of the Oast & Hook News addressed the estate tax laws that are effective for 2010. This issue of the Oast and Hook News will explore the issue of carryover basis. In previous years, the beneficiaries of estates received a great income tax benefit known as the “step up in basis.” In simple terms, this meant that a person inherited property with a basis equivalent to the fair market value at the time of the decedent’s death. A person’s basis in property is the value from which they determine whether there is any capital gain to pay upon its sale. For example, if a person purchased some shares of stock for $5,000, and then later sold the same stock for $10,000, the person’s basis is $5,000, and this person would pay tax on the $5,000 of capital appreciation. If that same person died owning the stock and it was worth $10,000 on the date of the person’s death, then whoever inherits the stock would have a “stepped up” basis of $10,000. If the person who had inherited the stock sold it for $10,000, then this person would pay no tax on the sale due to the step up in basis.
The step up in basis has been the rule for many years; however, under current law, there is no longer an automatic step up in basis for property. In 2010 beneficiaries inherit property with a carryover basis. Using the example above, the person inheriting the stock would inherit the stock with a $5,000 basis and would be required to pay taxes on the $5,000 capital gain when this person sells the stock. Congress has allowed a reprieve for some individuals, allowing a step up in basis of $1.3 million for property passing to someone other than a decedent’s spouse and a step up in basis of $3.0 million for property passing to a decedent’s spouse. Any property passing at death in excess of these amounts will receive carryover basis.
Carryover basis presents a number of potential problems, not the least of which is actually determining the basis in a decedent’s property. For many assets, basis is not as easy as determining what an individual paid for property. Most assets will have adjusted basis at one point or another. For example, stock with dividends reinvested gets a basis adjustment each time the dividends are reinvested; another common stock basis concern occurs with companies that have spun off from parent companies. For real property, basis includes not only the initial cost, but also the cost of certain capital improvements. Real estate and stocks are just two examples of property with basis. Many people are not aware of the basis in their property, and after their deaths, determining basis can be next to impossible. Carryover basis rules also allow the Internal Revenue Service to approximate the basis in an asset if it is impossible to obtain records.
Another concern with the carryover basis is in the allocation of basis. The executor of an estate must file an allocation with the Internal Revenue Service indicating the basis in the property, to whom the property has been distributed, and whether any of the $1.3 million step up has been allocated to the property. It is left to the discretion of the executor which property will receive some or any step up in basis. Many individuals have named as the executors of their estates family members, who are also beneficiaries of the estate. If an executor is allowed to make the step up in basis allocation, then there is nothing to prevent the executor from allocating the step up in basis to property passing to the executor and giving the other beneficiaries carryover basis property. This can lead to some obvious family problems as well as unfairness in distributions in spite of provisions in wills stating that all beneficiaries should be treated equally.
Finally, the Internal Revenue Service has provided for fines of up to $10,000 for not providing beneficiaries with basis information. For executors working with a large number of assets, or estates where basis information is not readily available, the additional pressure of a fine may make a difficult job even more difficult.
In conclusion, not only is 2010 a year of uncertainty for estate tax laws, carryover basis provides an additional burden both from a records keeping standpoint, and a tax standpoint for executors and beneficiaries of estates for individuals dying in 2010. With proper planning, you can improve this result and reduce the burden on those left behind.
The lawyers at Oast & Hook have studied the potential impact of the repeal of the federal estate tax and generation skipping transfer tax and are offering a free seminar to those who think they could be affected. Make sure your estate plan is not obsolete. Reserve your seat now. Oast & Hook will present this seminar twice on February 22nd at the Virginia Beach Central Library, 4100 Virginia Beach Boulevard, Virginia Beach, Virginia 23452. The first presentation begins at 10:00 a.m., and the second presentation begins at 4:00 p.m. If you have any questions about this seminar or to register, then please phone Jennifer Lantz at 757-399-7506.
Letha McDowell is an elder law attorney with Oast & Hook, and she practices in the firm’s Virginia and North Carolina offices.
O&H: Allie, we’ve heard that a university student group has found a way to relieve stress during final exams. Please tell us about it.
Allie: Sure! A Chapman University student organization called the Active Minds Club, a group that promotes mental awareness, had some puppies available outside the university library for students to play with during final exams week. Student event organizer Jennifer Heinz said, “It has been proven that having a dog helps relieve stress, so we thought it would be a cute idea if we brought some furry friends on campus. It’s just a nice way to step back from reality and just be stress-free for a moment.” The Active Minds Club also had pamphlets and resources available about how students can reduce stress and take care of themselves during their final exams. The 6,000 student campus in Orange, California, also hosted other exam week events, including a midnight breakfast served by professors. The puppy program sounds like a great idea, maybe they can add cats next semester! Speaking of breakfast, I’m getting hungry…. Let’s see if my mom has some treats handy. See you next week!
Oast & Hook will hold its quarterly Social Workers and Administrators Breakfast on Monday, February 15th at the Virginia Beach Central Library, 4100 Virginia Beach Boulevard, Virginia Beach, Virginia 23452. The topic is “Paying for Long-term Care Without Running Out of Money.” Registration beings at 9:00 a.m., and the presentation begins at 9:30 a.m. Questions will be answered from 11:00 a.m. to 11:30 a.m. The breakfast is designed to be both a networking opportunity and also an educational opportunity for area professionals who work with seniors, the disabled, and their families. Seats are limited, so please register early for this breakfast by phoning Jennie Dell at 757-967-9704.
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