New Basis Reporting Requirements

The IRS has long held that some taxpayers were cheating the system, claiming a low value for an asset on the estate tax return, while claiming a higher value for purposes of establishing basis for the asset when it is later sold (and thereby reducing any gain that must be reported for income tax purposes).

The IRS has now enlisted the assistance of executors and trustees in ferreting out the income tax basis for beneficiaries of inherited assets from trusts and estates. The IRS has developed Form 8971 for the executor or trustee to report the basis of assets of the estate or trust to the IRS. This must done within thirty days after the filing the Form 706 Estate Tax Return (the Form 706 must be filed no later than nine months after death, with one automatic extension of an additional six months allowed). The Form 8971 should be filed separately from the Form 706.

Form 8971 requires the executor or trustee to provide the following information:

The decedent’s name, date of death, and social security number;
The executor’s or trustee’s name, address, phone number, and taxpayer identification number.
The name, address, taxpayer identification number and date the basis was provided to each of the beneficiaries of the estate or trust.
A separate Schedule A prepared for each beneficiary, which includes the contact and identification information of each beneficiary as well as a description of each asset distributed to the beneficiary, its valuation date, and the value of the asset reported on the estate tax return (basis for the property). The executor or trustee also must indicate whether the asset increase estate tax liability. Generally, any property that qualifies for a marital deduction under Internal Revenue Code sections 2056 or 2056A or for a charitable deduction under Internal Revenue Code section 2055 will not generate estate tax and “no” should be indicated as the answer to this question with regard to those assets.
In addition to filing this information with the IRS, the executor or trustee must deliver a copy of the Schedule A relating to the beneficiary (but not the Form 8971 or Schedule As for other beneficiaries) to each beneficiary. The beneficiary is then required to use the value reported on their Schedule A in establishing the basis of any inherited assets that are subsequently sold.

It may not be possible for the executor to determine exactly which assets may be distributed to a particular beneficiary in satisfaction of their share. In that case, the executor must include information on all assets that may be used to satisfy the beneficiary’s share. The IRS recognizes that this would cause the information related to certain assets to be duplicated on the Schedule As of multiple beneficiaries.

The value to be reported on Form 8791 is the value as finally determined for estate tax purposes. Therefore, if an estate tax return is audited and adjustments are made, a Supplemental 8791 must be filed with the IRS and a new Schedule A must be provided to each beneficiary within thirty days of the conclusion of the audit.

Form 8791 must be filed for all estate tax returns required to be filed after July 31, 2015. However, a delay of the due date for filing Forms 8791 was set until February 29, 2016 so that the IRS could develop Forms, instructions and additional guidance. All Forms 8791 associated with estate tax returns filed after January 30, 2016 must be filed thirty days after the filing date of the Form 706. The penalty for untimely filing or failure to file a Form 8971, or for providing an incomplete Form 8791 or one that contains inaccurate values, can be quite punitive, reaching as high as $3,193,000.

The IRS did offer some good news. No Form 8791 is due if the estate is not large enough to require the filing of a Form 706. For 2016, Form 8791 is not required for estates with taxable estate plus adjusted taxable gifts (line 5 of Form 706) of less than $5,450,000. Additionally, if the estate is not otherwise taxable and is being filed only to elect portability for the surviving spouse – or if the 706 is being filed only for generation transfer tax purposes, then no Form 8791 will need to be filed.

As if the job was not hard enough already, the duties of executors and trustees have now become more difficult. The executor or trustee will likely need to consult with a qualified estate planning attorney or tax professional to assure compliance with the new requirements for Form 8791.

Our law firm focuses on estate planning as well as the administration of trust and estates. We can assure that executors and trustees are properly carrying out their duties, including those now being imposed by the IRS for the timely filing of Form 8791. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information regarding new developments and planning strategies. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.