November 01, 2005

Carryover Basis - Have We Learned from History? (2005, 19:06)

Carryover Basis - Have We  Learned from History?

Probate and Property, November/December 2005, Volume 19, Number 6

By Marc S. Bekerman and William P. LaPiana
Marc S. Bekerman is a partner with the New York, New York, firm of Fleischman & Bekerman LLP, a Section Council member, and a group vice-chair of the Probate & Trust Division’s Special Division Activities Group. William P. LaPiana is a professor of law at New York Law School, a Section Council member, and a contributing editor to Probate & Property’s “Keeping Current—Probate” column.

“We learn from history that we do not learn from history.”
- Georg Friedrich Wilhelm Hegel (1770–1831)

Section 1014 of the Internal Revenue Code of 1986, as amended, allows in most cases for a beneficiary to take the fair market value of the property as of the date of the decedent’s death as her basis of property that she acquired from a decedent. In 1976, Congress attempted to repeal this so-called “step-up” in basis with a system in which the beneficiary would receive a carryover basis from the decedent. This system was so unsuccessful that it was repealed retroactively shortly after passage.As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L. No. 107–16, 115 Stat. 38, the estate tax is eliminated for one year (specifically 2010). Because much of the justification for the step-up in basis is tied to the imposition of an estate tax, EGTRRA also created a modified carryover basis system. Given that the likelihood of estate tax repeal before 2010 has increased, it is also more likely that such a modified carryover basis system also will take effect before 2010. Although many attorneys have modified their documents since the passage of EGTRRA to take into account larger applicable exemption amounts, and even possible repeal of the estate tax, very few attorneys have taken steps to plan for carryover basis.This article will analyze the modified carryover basis system contained in Code § 1022, identify problems that may require legislative or administrative solutions, and present suggestions in planning for such a system.

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