For 2011 Deaths, Form 706 Instructions Finalized; For 2010 Deaths, Form 8939 Finalized

September 29, 2011

The IRS has finalized the instructions for Form 706 for estates of decedents dying in 2011. The final instructions largely follow a prior draft, but do give additional insight into the portability of the deceased spousal unused exclusion amount (DSUEA). The instructions reiterate the the election to use the DSUEA in the estate of the surviving spouse in 2011 or 2012 is made by timely filing Form 706 in the first spouse's estate. If a Form 706 is filed in the first spouse's estate and the election is not desired, an attachment stating such can be attached to Form 706 or "No election under Section 2010(c)(5)" can be written at the top of the Form. Failure to file a Form 706 in the first spouse's estate (irrespective of whether any tax is due) results in no unused exclusion amount being available to the surviving spouse if the surviving spouse dies in 2011 or 2012. The instructions point out that at the death of the surviving spouse in 2011 or 2012, a copy of the predeceased spouse's Form 706 and calculation of the unused exclusion amount must be shown on page 1 of the surviving spouse's Form 706. The executor must also complete Part 4 of Form 706 and indicate on the Explanation line that the election was made in the first spouse's estate. If the surviving spouse had more than one spouse during life, the executor must list the names and Social Security numbers of each prior spouse and the reason for the termination of each prior marriage. To view the final instructions for the 2011 Form 706:

October 3 is the filing deadline for estates of decedents dying on January 1, 2011.  An automatic six-month extension for filing form 706 for 2011 deaths is available by filing Form 4768.  IR-2011-97. 

The IRS has also finalized Form 8939 for deaths in 2010.  This is the "Large Transfers Return" which is used to elect out of the estate tax for 2010 deaths and make income tax basis allocations to the decedent's property.  To view the final Form 8939: Form 8939-Final.pdf   To read the instructions for Form 8939: Form 8939 Instructions.pdf  The instructions point out that no basis increase is available if the executor does not establish the market value of the assets (i.e., cost basis) to which a basis increase is being allocated.  A reasonable estimate is not acceptable.  Also, it appears that assets cannot be lumped together and valued and then placed under general headings on Form 8939.  IRS also stated that if an executor takes a position on Form 8939 that is beyond that allowed by Rev. Proc. 2011-41, none of the safe harbors of Rev. Proc. 2011-41 apply.  But, courts view Rev. Procs. differently.  They are, at best, low-level IRS authority that are not the final authority on the issue or issues addressed by the Rev. Proc.  On the other hand, the instructions do allow an executor to approximate the decedent's date of acquisition of an asset.  As for fractional interests, IRS stated that a basis increase amount is limited to the property that was "owned by" the decedent.  For, property that isn't distributed by Jan. 17, 2012, the instructions do not provide any guidance. 

The IRS has also finalized Publication 4895, "Tax Treatment of Property Acquired From a Decedent Dying in 2010": Publication 4895.pdf