UPDATE: Since this blog posted on March 22, the IRS has extended the deadline to file Form 8971 to June 30, 2016.
As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act) passed last year, Code Sections 1014(f) and 6035 were enacted to ensure that basis, or the value, of a property acquired from a decedent remains consistent with the basis used for estate tax purposes. Accordingly, the executor of an estate filing a return must furnish to the IRS and to the person acquiring the property a statement, via Form 8971, indicating the value of that property.
On March 2, 2016, the IRS published proposed and temporary regulations under Code Sections 1014 and 6035. The proposed regulations confirm and clarify some important points. They:
- Reiterate the March 31, 2016, deadline (as noted above now changed to June 30, 2016) to file Form 8971 for estates that had returns filed on or after July 31, 2015.Going forward, the deadline will be the earlier of 30 days after the deadline for the estate tax return or 30 days after the return is filed. There are penalties for failure to file this form as well as accuracy-related penalties if the basis of the property claimed on a return exceeds its final determined value in the estate.
- Clarify which estates must file Form 8971.When the new code sections were introduced, it seemed that any estate tax return filed would be required to file Form 8971. The proposed regulations clarify that Form 8971 is not required to be filed when an estate tax return is filed solely to elect portability, or a generation-skipping transfer tax election or exemption allocation.
What to Report — And What Not To
If you are trying to figure out what assets ARE REQUIRED to be reported on Form 8971, they include:
- Property that is includible in the gross estate under Code Sec. 2031 and is subject to tax under Code Sec. 2106 that will generate an estate tax liability greater than the allowable credits.
- Assets that qualify for the marital deduction or the charitable deduction, even though basis consistency rules are not applicable to these assets.
On the other hand, assets that are NOT REQUIRED to be reported on Form 8971 include:
- Cash (other than collectible coins)
- Income in respect of a decedent (IRAs, qualified retirement plans, etc.)
- Most tangible personal property that do not require an appraisal
- Property sold by the estate and therefore not distributed to a beneficiary
What If the Value Changes?
The final value is defined under Proposed Reg. §1-1014-10 (c)(1) as the value reported on the federal estate tax return once all time has passed for adjusting or contesting the value. The regs also clarify what happens if Form 8971 is filed and it is determined that the final value of the property reported has changed. In that case, a supplemental filing of Form 8971 could be required, as explained in Reg. §1.6035-1(e). Supplemental filings are needed to correct an error or to add an asset that was omitted from the original filing. In cases where the original recipient transfers the asset to a related party, e.g., a child received property from a parent and subsequently gifts the property to a grandchild 10 years later, a supplemental filing also may be needed. A supplemental filing is not required if the original filing listed several potential assets that a beneficiary may receive and then that beneficiary only received some of those assets.
Waiting for the Final Say
A hot topic that will hopefully be addressed when the final regulations are issued relates to zero basis reporting. If an asset was omitted from the estate return and the statute for filing has passed, or an estate return that was required to be filed but was not filed by the statutory due date, the basis of the asset received by the beneficiary is considered to be zero, until such time as the executor files the return. (This is directly counter to Sec. 1014(a), which tells us the basis is equal to fair market value on the date of death).
A best practice while we wait for the final regulations is to discuss your situation with your advisors.
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.