Previous articles and information posted by The McGuire Law Firm have discussed issues related to a step up in basis and carryover basis depending upon whether the property was gifted during a donor’s lifetime or acquired at death via inheritance. Given the marital deduction, Congress was concerned that certain individuals may take advantage of the unlimited marital deduction and code sections that allow for a step up in basis. Thus, Internal Revenue Code section 1014(e) was enacted to prevent certain abuse. The article below has been prepared by a tax attorney in Denver to provide additional information related to IRC Section 1041(e). Please remember that this article is for informational purposes and you should always contact your tax attorney or estate planning attorney directly regarding your tax and estate planning matters.
IRC Section 1014(e) prohibits a step up in basis in regards to appreciated property that was acquired by the decedent via a gift within one year of their death. Thus, section 1014(e) would provide for a carryover basis for such property. Section 1014(e) specifically states: In the case of a decedent dying after December 31, 1981, if: (A) appreciated property was acquired by the decedent by gift during the 1 year period ending on the date of decedent’s death, and (B) the property is acquired from the decedent (or passes from the decedent to) the donor of the property (or the spouse of such donor), the basis of the property in the hands of such donor (or spouse) is the adjusted basis of the property in the hands of the decedent immediately before the death of the decedent. Appreciated property is defined as “any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.”
By requiring that the donee spouse survive for at least one year after the transfer, IRC Section 1014(e) limited the ability of a tax free transfer to a terminally ill spouse and then the receipt of such property upon the death of the terminally ill spouse with a step up in the basis of the property. Moreover, the Internal Revenue Service has also ruled that IRC Section 1014(e) will apply to portions of property that are held in a joint revocable trust funded with assets that were held by the grantors as tenants by the entireties.
In 2001, the Economic Growth and Tax Relief Reconciliation Act repealed Section 1014, and a carryover basis position was implemented under IRC Section 1022. This code section will (or may) apply to decedents passing after December 31, 2009. IRC Section 1022 holds that property received from a decedent is treated as if received via a gift, thus the recipient of the gift would have a basis equal to the lesser of the decedent’s adjusted basis of the fair market value as of the date of death. Thereafter the 2010 TRA did reinstate the estate tax and fair market value basis at death provisions, and repealed the IRC Section 1022 carryover basis for decedents passing after 2009. Thus, the provisions and application within these code sections can be confusing, and it is important to understand the history. Again, when looking at the application of these sections and provisions, you should always consult with your estate planning attorney and/or a tax attorney or tax professional.
If you have tax questions or questions related to your estate plan, contact The McGuire Law Firm to speak with a Denver estate planning attorney or tax attorney. The McGuire Law Firm provides a free consultation with an estate planning attorney and tax attorney in Denver, Colorado.