Partnership agreements and limited liability company operating agreements frequently include provisions governing a basis adjustment under partnership tax law Code Section 754. If the carryover basis is elected by the executor, the implementation of a Code Section 754 election may change. The basis of an LLC or partnership interest may not be the same as under prior law. The executor making the allocation of the basis adjustment under the new carryover basis regime, in contrast to prior law, might be held liable for allocating basis adjustment to a partnership or LLC if the general partner, manager, or members have to approve the adjustment. In the past, since the step up in basis was automatic, there was no issue for the executor other than pursuing the adjustment. However, under the new paradigm, since the basis adjustment is limited, if an executor allocates the limited $1.3 or $3 million basis adjustment to a partnership interest, and the Code Section 754 election is not automatic, the executor might be questioned by the beneficiaries for wasting the limited benefit of the basis adjustment. On the other hand, if the partnership or LLC interest is highly appreciated, and the executor does not allocate basis adjustment to this interest, the executor could be held liable for not maximizing the tax benefits.
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