How the 2010 Estate Tax and Gift Tax Rules Remain Relevant

Man Signing Tax Form
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The year 2010 was an important marker for estate tax and remains relevant today. Thanks to the passage of the estate tax provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA or TRA 2010), in 2010, the heirs of decedents who died during that year were offered the choice: use the modified carryover basis rules or apply the retroactively reinstated estate tax. Among the other results were implementation of the largest estate tax exemption ever, at $5 million, and the smallest estate tax rate ever, set at 35 percent.

In 2013, the American Taxpayer Relief Act (ATRA), rendered most of the changes to TRA 2010 permanent, though the tax rate increased.

In 2015, even more beneficial terms were laid out for estate tax, gift tax, and generation-skipping transfer tax exemptions. All three were indexed for inflation from 2012 through 2015.

Here are the terms:

The estate tax exemption increased from $5 million in 2010 to:

  • $5.12 million in 2012
  • $5.25 million in 2013 
  • $5.34 million in 2014
  • $5.43 million in 2015. 

The lifetime gift tax exemption increased from $1 million in 2010 to:

  • $5.12 million in 2012
  • $5.25 million in 2013
  • $5.34 million in 2014
  • $5.43 million in 2015

The maximum generation-skipping transfer tax rate went from zero to:

  • 35 percent in 2012
  • 40 percent in 2013 and for future years. 

Fast-forward to the Tax Cuts and Jobs Act of 2017, which passed on Dec. 20, 2017. The federal estate, gift, and generation-skipping transfer tax exemptions increased to twice their size, but will revert to pre-2018 exemption rates on January 1, 2026.

Here's a summary of the changes made to the federal estate and gift tax laws under the terms of TRA 2010:

Modified Carryover Basis Rules

Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax exemption was gradually increased, and the estate tax rate was gradually decreased until 2010 when the federal estate tax was scheduled to completely disappear for that year only. In place of the federal estate tax, EGTRRA introduced the "modified carryover basis rules," which affect the income tax consequences of inheriting property.

Under the modified carryover basis rules, the income tax basis of inherited property could be stepped up by $1.3 million, as opposed to an unlimited step-up in basis under prior estate tax laws. In addition, if the property was inherited by a surviving spouse—either directly or through a qualified terminable interest property (QTIP) trust—then the property could receive an additional $3 million step-up in basis.

Under the terms of TRA 2010, the estate tax is the default rule for people who passed away in 2010. So in order for the heirs of 2010 to opt into the modified carryover basis rules and out of the estate tax rules, the heirs would have needed to file a new IRS form called Form 8939, Allocation of Increase in Basis for Property Received from a Decedent. It is an information return only, as opposed to a tax return, and was due on or before Jan. 17, 2012. Extensions of time to file Form 8939 were granted, and amended forms had to be filed only in limited circumstances.

Information on extensions and amendments can be found in the instructions and Notice 2011-66.

Which 2010 estates should have chosen to apply the modified carryover basis rules as opposed to the estate tax rules? In general, the heirs of a 2010 estate that exceeded $5 million would have had to run the numbers to determine if applying the modified carryover basis rules versus the estate tax rules made sense, since there would be a breaking point at which it would make more sense to apply one instead of the other.

2010 Estate Tax Rules

Under the provisions of TRA 2010, the federal estate tax—which, as previously mentioned, was supposed to completely disappear for the 2010 tax year under the terms of EGTRRA—was resurrected and retroactively applied back to January 1, 2010, for all 2010 estates. The kicker to this new estate tax law is that it offered the largest estate tax exemption ever—$5 million—and the smallest estate tax rate ever, set at 35 percent. Aside from this, the heirs of 2010 decedents who opted to make use of the estate tax rules instead of the modified carryover basis rules would have received a full step-up in basis of their inherited property.

The estate tax rules are the default rules for 2010 estates. If the gross estate did not exceed $5 million, then the heirs did not have to do anything and received a full step up in basis in their inherited assets. But if the estate exceeded $5 million in value; the death occurred between Dec. 1 and Dec. 17, 2010; and the heirs wanted to apply the estate tax rules instead of the modified carryover basis rules, then the heirs would have needed to file a federal estate tax return, IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on or before Sept.

19, 2011. But the IRS created confusion by not releasing the final version of 2010 Form 706 until early September.

For the heirs of 2010 estates that exceeded $5 million and whose deceased benefactor died between Dec. 18 and Dec. 31, 2010, if they wanted to apply the estate tax instead of the modified carryover basis rules, then they would have needed to file IRS Form 706 on or before nine months after their deceased benefactor's date of death, except that, as mentioned, the form was not released until early September.

For this reason, the heirs of 2010 estates who needed to file Form 706 but could not get it prepared and filed on time should have filed IRS Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, in order to receive an automatic six-month extension of time to file Form 706 and pay any taxes that may be due.

2010 Gift Tax Rules

While TRA 2010 made significant changes to the rules governing federal estate taxes, it did not affect the lifetime gift tax exemption, which remained at $1 million. However, under the provisions of EGTRRA, the gift tax rate was supposed to be reduced from 45 percent in 2009 to 35 percent in 2010, and TRA 2010 did not affect this reduction in the gift tax rate.