Carryover Basis vs. Estate Tax

Executors of estates of individuals who died in 2010 have a choice between two systems of estate taxation and asset basis determination. Executors can choose to use the current exclusion or to use the modified carryover basis.

The modified carryover basis rules allow the estate representative to increase the basis of items of property by $1.3 million. The representative cannot increase an item above its fair market value at the time of the decedent’s death, and the $1.3 million limit “is increased by the amount of the decedent’s unused capital loss carryovers and net operating loss carryovers.”

In 2010, the Tax Relief Act provided the current exclusion, setting the estate tax rate limit at 35% and creating a $5 million exemption. The act allows executors of estates of those who died in 2010 to elect to use the modified carryover basis rules instead of using the exemption. Though it seems that executors would have a relatively easy time choosing which system to use (estates over $5 million would make the election, estates under would not), many factors can complicate the decision.

For more information on deciding whether to take the election, see Justin P. Ransome, CPA, J.D. and Frances Schafer, J.D., Estate Tax or Carryover Basis? Practitioners must weigh the better option for estates of decedents who died in 2010, Journal of Accountancy, July 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.