On October 19, 2011, the Internal Revenue Service released Publication 4895, Tax Treatment of Property Acquired from a Decedent Dying in 2010. This Publication is the last likely guidance to be issued from the Service prior to the January 19, 2012 deadline for filing the Form 8939 or the March 17, 2012 deadline (if an extension was requested) for filing the 2010 Form 706 for 2010 decedents. Publication 4895 can be found at: www.irs.gov/pub4895.

As a reminder, in order for Personal Representatives/Trustees to elect out of the default estate tax law for decedent's dying in 2010 (i.e., having the modified carry over basis rules apply to property acquired from a decedent in 2010), the Personal Representative/Trustee must make a valid and timely election on Form 8939. If a Personal Representative/Trustee does not make a valid and timely election, the rules in effect for determining basis and property acquired from a decedent who died immediately before 2010 will apply. For information on the rules applicable if this election is not made, Personal Representative/Trustees should review Publication 551.

The purpose of Publication 4895 is to help Personal Representative/Trustees, as well as those who acquired property from a decedent dying in 2010 for which the modified carry over basis rules are being applied, determine the tax treatment for the property so acquired.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.

The Tax Relief Act of 2010 indexed the $5 million gift and estate tax exemption for inflation. As a result, the gift and estate tax exemption for 2012 will increase from its current level of $5 million to $5.12 million. This also applies to the GST exemption. However, without further Congressional action before 2013, the gift and estate tax exemption will return to $1 million in 2013 without an inflation adjustment.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

Clients age 70½ or older who recharcaterized a 2010 Roth IRA conversion in 2011 should make sure that their 2011 RMD obligation is satisfied. Otherwise, they face a 50% penalty on the shortfall. For them, the 2011 RMD is calculated by adding the recharacterization value of the Roth IRA back to the 12/31/2010 traditional IRA balance. The following example illustrates this further.

Example: Barney, age 75, converted one of his two traditional IRAs ("first IRA") to a Roth IRA last year. At the time of conversion, each IRA was worth $200,000. The 12/31/2010 balance of the Roth IRA was $176,000; that of the remaining traditional IRA ("second IRA") was $220,000. On January 10, 2011, Barney took his 2011 RMD of $10,000 ($220,000÷22.0) from second IRA. On October 10, 2011, Barney recharacterized the Roth IRA by transferring the $187,000 then in the account back to first IRA. Barney knows that he has to take more from one of the IRAs to satisfy his 2011 RMD obligation, but he erroneously takes only $8,000 more, based on the year-end Roth IRA balance ($8,000 = $176,000÷22.0). Barney is $500 short because his numerator should have been the value of the Roth IRA at the time of recharacterization or $187,000 ($8,500 = $187,000÷22.0). To avoid the $250 penalty, by year-end, Barney must either take the additional $500 himself or have it distributed directly to a qualified charity. Also, if he plans to reconvert first IRA, Barney should satisfy his RMD obligation before doing so, since RMDs cannot be converted to Roth IRAs.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.