2010 was a very interesting year from the perspective of estate taxes: it was the only year in which the estate tax was completely repealed. The IRS has just gotten around to finalizing regulations on how to value the estates of people who died in 2010.
In 2010, with no estate tax in place, decedents’ estates were required to apply a “carryover basis” for assets passing through the estate. This means that recipients of property from estates received the adjusted basis of the decedent, which could result in the taxation of gain on those assets when the beneficiaries sell or dispose of estate assets. Current law provides a stepped-up basis of the fair market value at the date of death, a rule that essentially prevents income taxation of appreciated estate assets.
The final regulations are contained in Treasury Decision 9811 and not only cover the basics, but also address issues such as recapture on leased property, basis issues relating to recognition of gain on transfers to foreign trusts, and recapture of depreciation on tangible personal property.