The IRS has issued a form with which, if applicable, Executors can report the value for estate tax purposes of any property distributed by an estate. Under a recent amendment of Internal Revenue Code §1014, estate beneficiaries must use a basis  (property cost) consistent with that reported for estate tax purposes, and Executors are required to report those values to both the IRS and beneficiaries.

New Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, and “Schedule A” is to be used by Executors to report the estate tax value of any property distributed by an estate to both the IRS and beneficiaries on Schedule A.  The obligation to file these forms are based upon the consistent basis reporting requirements enacted under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“Surface Act”) which added a new Internal Revenue Code §6035 .

The Surface Act amended Internal Revenue Code (“IRC”) §1014 to require that the basis of property acquired from a decedent be consistent with the basis reported on the estate tax return. Prior to the Surface Act, there was no requirement that the basis of property acquired from a decedent be consistent with the value of the property reported for estate tax purposes.  In the case of property for which the final value has been determined for estate tax purposes, the beneficiary’s basis can no longer exceed the final value determined for estate tax purposes. The final value for purposes of the federal estate tax may differ from that reported on the estate tax return.   According to the instructions to Form 8971, value is considered “final” when:

  • The value of the property shown on an estate tax return filed with the IRS is not contested by the IRS before the period of assessment expires;
  • The value of the property is specified by the IRS and is not timely contested by the estate; or
  • The value of the property is determined by a court or pursuant to a settlement agreement with the IRS, including the resolution of a claim for abatement or refund.

If information reported on Form 8971 and the Schedule(s) A filed with the IRS or provided to a beneficiary differs from the final value (as the result of the resolution of a valuation dispute or otherwise), the executor or other person required to make this filing must file a supplemental Form 8971 and affected Schedule(s) A with the IRS and provide an updated supplemental Schedule A to each affected beneficiary no later than 30 days after the adjustment.

If the final value has not been determined for estate tax purposes, the beneficiary’s basis cannot exceed the value as reported on Form 8971 and Schedule A.   The value of the property to be reported on the Form 8971 and the attached Schedules A is the fair market value of the asset as reported on the estate tax return. The basis consistency requirements under IRC §1014 only apply where the inclusion of the property in the decedent’s estate increased the estate tax.

The new reporting requirements applies to property for which an estate tax return is required to be filed after July 31, 2015, but has been delayed by the IRS several times.  Most recently, in Notice 2016-19, the IRS delayed the initial reporting deadline for executors of estates to report the value of property included in the estate to March 31, 2016.  Notice 2016-19 also advises executors to wait to prepare Form 8971 and Schedule A until the IRS issued proposed regulations under Internal Revenue Code §6035, which the IRS expects to be issued “very shortly.”  As of now, assuming the March 31, 2016 deadline is not further delayed, the executor of any estate that was required to file an estate tax return after July 31, 2015 and before March 31, 2016, must file Form 8971 and issue Schedule A by March 31, 2016.

On Form 8971, executors must identify each beneficiary that received an interest in property, the property acquired, the property’s estate tax value, the date the property was received, and the valuation date of the property. The executor is also required to prepare a separate Schedule A for each beneficiary that received property from an estate. According to the instructions, Form 8971 is not required for an estate whose value is less than the estate tax exclusion but that files Form 706 solely because of the generation-skipping transfer tax. Form 8971 must be filed with the IRS and the Schedule A for each individual beneficiary must be provided to that beneficiary no later than the earlier of:

  • The date that is 30 days after the date on which Form 706, Form 706-NA, or Form 706-A is required to be filed (including extensions) with the IRS; or
  • The date that is 30 days after the date Form 706, Form 706-NA, or Form 706-A is filed with the IRS.

Penalties can apply to a beneficiary who fails to report a basis consistent with the amount reported by the estate.