Estate beneficiaries, take notice. An estate-related item in the president’s budget proposals for many years was enacted into law on July 31, 2015. Reporting has been delayed until June 30, 2016, and your action may be required.
Enacted as part of the Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015 (Highway Act), new Internal Revenue Code (IRC) section 1014(f) requires consistency, really defined as not to exceed, in the amount of basis utilized between an estate and anyone that receives certain property passing from an estate where the property received increased the liability for estate tax purposes. In addition, new IRC section 6035 was created to require the reporting of values to “each person acquiring an interest in property included in the decedent’s gross estate” and to the Internal Revenue Service. Section 6035 applies only if an estate return is required to be filed and excludes those estates filing an estate tax return merely to elect portability.
New Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, has been developed by the IRS for reporting the final estate tax value of property distributed (or to be distributed) from an estate. While these new provisions, and Form 8971, are primarily addressed to the executor of an estate, anyone who receives property from an estate will also need to comply with the new rules, especially related to Form 8971 reporting.
How It Works
To illustrate the new rules, let’s say an estate, created by a decedent’s death in November 2015, and required to file an estate tax return, passes a property to a beneficiary valued in the estate return at $400,000. The estate provides the beneficiary, in a timely manner, with Schedule A of Form 8971, detailing the description of the property and the value shown in the estate tax return.
One year after receiving the property from the estate, the beneficiary gifts the property to one of their children. The beneficiary making the gift is now subject to the basis reporting requirements and will need to provide the child receiving the gift and the IRS with Form 8971 and appropriate schedules within 30 days of the gifting date. This provides the child with the information for reporting subsequent actions related to the property and the IRS with the means to track the property activity.
In this case, the beneficiary would also need to notify their tax preparer of the gift for any gift tax reporting required. It’s good practice for anyone receiving a Schedule A of Form 8971 to provide their tax preparer with a copy for reference in reporting future transactions.
Beneficiaries should also be alert to subsequent notices from the estate related to the property that could affect actions they have already taken related to a property that was subject to
Form 8971 reporting.
A New Consistency Provision and Reporting Requirement
Assume, rather than gifting the property received as in the example above, the beneficiary sells the property for $500,000, realizing a gain of $100,000 after considering the $400,000 estate basis provided. Two years after the property was sold, the beneficiary is notified by the executor of the estate—by providing the beneficiary new Form 8971 information—that the IRS adjusted the value of the property during an audit of the estate tax return, increasing the value to $450,000. The beneficiary now must deal with the increase in basis and the resulting reporting changes of a previously filed return. If the statute of limitations has closed on the ability to file an amended return, they must suffer the loss of paying tax on $50,000 of over-reported gain on the sale transaction.
The Form 8971 and the required schedules a beneficiary may be required to file is considered an information return and is subject to penalties for failure to file. The failure to file penalty is generally $250 per required form, but if the failure is due to intentional disregard of the rules for filing the return, the penalty is the greater of $500 or 10 percent of the aggregate amount that should have been reported, which can become a sizeable amount.
The new consistency provision and reporting requirement described above should be applied when an estate tax return is filed after the date of enactment of the Highway Act, which as noted previously, was July 31, 2015. That means that these new rules can even apply to a decedent who dies prior to July 31, 2015.
There are still a number of questions to be discussed and resolved related to the new rules for consistent reporting of estate value basis, but if you are a beneficiary of a recent estate you need to be aware of the new rules and determine if you are subject to any of the new basis reporting requirements.