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In 2001, the Economic Growth and Tax Relief Reconciliation Act repealed Section 1014, and a carryover basis position was implemented under IRC Section 1022.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  Thereafter the 2010 TRA did reinstate the estate tax and fair market value basis at death provisions, and repealed the IRC Section 1022 carryover basis for decedents passing after 2009.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.

Prior to revision the Internal Revenue Code only allowed  a step up in basis to the fair market value of the property at the date of death if the property passed from decedent by a bequest, inheritance or devise.  Thus, property held jointly did not receive a step up in basis because the property was viewed to have been acquired via a lifetime transfer, not an inheritance, bequest or devise.  When the Internal Revenue Code was later amended, Congress must have considered why a step up in basis for jointly held property would not be allowed when the property was included in the gross estate of the decedent for estate tax purposes.  Therefore, the code was changed to allow a step up in basis for property passing to the survivor of a joint interest.  The basis of the property could be stepped up or increased to the fair market value as of the date of death, or on the alternative valuation date if an alternative valuation date was elected.  It is important to note that joint property treated as income in respect of decedent under Section 691 of the Internal Revenue Code, is an exception to the current rule and thus does not receive the step up in basis.

What happens if only a portion of the joint property is included within the estate of the first joint tenant to pass away?  The survivor’s basis may be determined in part by the rules of Section 1014, potentially receiving a step up in basis and in part by reference to the basis of the survivor before the deceased joint tenant’s death.  This can be troublesome for the survivor, if the survivor received the property through titling (for example as tenants by the entirety) because the transfer can predate certain code sections and the transfer may not be treated as a gift.  Thus, could one tenant’s basis be zero?

Given the benefit of a step up in basis, individuals need to plan carefully when orchestrating their overall estate plan.  Under certain circumstances, it may be better for an individual to inherit property as opposed to a life time gift.  Of course, each individual’s circumstances are different and should be discussed with their tax attorney and/or estate planning attorney.

You can contact The McGuire Law Firm to discuss your estate and gifting matters with a Denver estate planning attorney, and discuss the tax implications of certain gifts with a tax attorney.

You can contact The McGuire Law Firm to discuss your tax, gift and estate related issues with a tax lawyer in Denver, Colorado.  The McGuire Law Firm provides a free consultation with a tax attorney and/or estate planning attorney.

Contact The McGuire Law Firm to schedule your free consultation with a Denver estate planning attorney or tax attorney!

If the transfer is made between spouses, or is a transfer incident to a divorce, basis would be determined under Internal Revenue Code Section 1041 as opposed to Section 1015.  Under IRC Section 1041, the transfer would be treated as a gift whereby no gain or loss is recognized and the transferee or recipient of the gift would take the transferor’s adjusted basis, or a carryover basis.

An example may help illustrate the above issues.  For this example, assume that Mr. Husband purchased real estate with a value of $700,000 of his own funds, and the property is held jointly with his wife as joint tenants.  Further, we will assume wife is a US Citizen and that the interests of the spouses would be severable under state law.  Thus, both husband and wife would be considered to own 50% (fifty percent) or half of the interest real property.  The gift to wife of $250,000 would not be taxable because of the marital deduction under Internal Revenue Code Section 2523.  Because husband’s adjusted cost basis would determine wife’s adjusted basis in the property received via the gift, wife’s adjusted basis in the real property should be $250,000.

It is important to note Regs 1.1041 because the carryover basis under IRC Section 1041 would apply even if the adjusted basis in the property that has been transferred exceeded the fair market value of property that the time of transfer.  Therefore, transfers of property subject to IRC Section 1041 can produce a different result than when applying the tax law under IRC Section 1015.

If you have questions relating to gifts or your estate plan, please contact a Denver estate planning attorney at The McGuire Law Firm.  An estate planning attorney can assist you with gifting issues and the drafting of estate planning documents such as a will or trust.