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    « What Is An "Estate Plan" Anyway? | Main | Expanded Estate Recovery: Negative Impacts of Proposed Legislation »

    What Executors and Personal Representatives Need to Know About Basis Reporting

    With the March 31, 2016 deadline for estates required to report basis information now behind us, personal representatives, executors and their advisors are scrambling to make sure they properly comply. The new basis reporting requirement was created by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, effective for estate tax returns required to be filed after July 31, 2015, in an effort to ensure that estates and their beneficiaries are reporting the same values to the IRS. New Sec. 1014(f) requires consistent basis reporting between an estate and a beneficiary, and new Sec. 6035 imposes a reporting regime whereby an executor of an estate who is required to file a federal estate tax return must also provide statements to the IRS and to each beneficiary reporting the values of estate property.


    Since the legislation passed, and to provide additional guidance, the IRS delayed the initial deadline for estates required to report basis information to March 31, 2016; though, generally, the deadline would be only 30 days from the earlier of the date the estate return is required to be filed or is actually filed. On March 2, 2016, the IRS issued the guidance everyone was waiting for — proposed regulations (REG-127923-15), which may be relied upon. While many aspects of the legislation would be clarified in the proposed regulations, unexpected new burdens would arise should the proposed regulations be finalized. Here’s what executors and their advisors need to know when it comes to basis reporting:

    • Reporting: A final Form 8971Information Regarding Beneficiaries Acquiring Property From a Decedent, and its Instructions were issued at the end of January. An executor must file Form 8971, including all Schedules A, with the IRS. A separate Schedule A (but not a Form 8971) must be provided to each beneficiary receiving property from the estate. According to the proposed regulations, for trust, estate, or entity recipients, Schedule A would be provided to the trustee, executor, or entity, respectively.

    • Undistributed Property: As stated above, Form 8971 and Schedules A are generally due shortly after the filing or due date of the federal estate tax return. It is often the case at that point in time that estates have not yet distributed property and cannot yet identify the property that will be eventually distributed to each beneficiary. The proposed regulations would address this problem by requiring an executor to list on a beneficiary’s Schedule A all property that could potentially be used to satisfy the beneficiary’s interest. However, there is speculation among practitioners that without a better explanation on Schedule A, this reporting method could be confusing to beneficiaries and cause them to believe they are entitled to more property than they will be receiving. Once an estate’s distributions are determined, an executor would not be required to file a supplemental Form 8971.

    • Returns Filed But Not Required: The proposed regulations would clarify that basis reporting would not be required for estates that filed a federal estate tax return merely for purposes of electing portability, making a GST exemption allocation, or any other reason.

    • Excluded Assets: Under the proposed regulations, certain assets would be excluded from the basis consistency and basis reporting requirements, such as: (1) cash (other than coin collections); (2) items of income in respect of a decedent (IRD); (3) tangible personal property with a value of under $3,000; and (4) property sold, exchanged, or otherwise disposed of by the estate in a taxable transaction. While property that qualifies for the federal estate tax marital or charitable deductions would not be subject to the §1014(f) basis consistency requirement because it would not increase the estate’s federal estate tax liability, such property would still be subject to the §6035basis reporting requirement.

    • Subsequent Transfers: Perhaps the most significant proposed regulation would be the additional filing obligation for certain subsequent transfers of property that were subject to the basis reporting requirement. If the beneficiary receiving the property subsequently transfers the property to a family member or controlled entity, the beneficiary-transferor must file a supplemental Form 8971 with the IRS (and sometimes the executor) and provide the transferee with a Schedule A within 30 days of the transfer. The IRS explained in the preamble to the proposed regulations that it is concerned about opportunities to circumvent the purpose of the statute. However, many practitioners worry that those that would be affected by the rule, i.e., the original beneficiaries of the property, are unlikely to know they have a filing obligation.

    • Zero Basis Rule: Another surprising rule found in the proposed regulations would give beneficiaries a zero basis, rather than a step up in basis, for estate assets an executor fails to report on a federal estate tax return before the expiration of the statute of limitations, either because the property was later discovered or otherwise omitted. Additionally, where a federal estate tax return was never filed, the basis of property would be zero until the final value is determined.

    This likely will not be the last you hear on the proposed regulations. Comments on the proposed regulations were due June 2, 2016, and a couple of organizations made submissions to urge the IRS to further delay the initial reporting deadline. Stay tuned.....

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