Proposed Basis Consistency Regulations

The Internal Revenue Service released proposed and temporary regulations to further consistency in the reporting of the tax basis of certain property received by a beneficiary of an estate or trust. These regulations provide guidance regarding the basis consistency requirements under IRC 1014(f) and reporting requirements under IRC 6035.

For estates with tax due after July 31, 2015, the executor or trustee is required to file Form 8971 indicating information about the beneficiaries, the property to be acquired by the beneficiaries, and the estate tax value of the property. The initial basis of the beneficiary may not exceed the basis reported to the IRS on such form. The executor is also required to furnish a statement (Schedule A of Form 8971) to each beneficiary who will acquire property from the estate including the value of the property. Estates filing tax returns to elect portability for a surviving spouse are not required to file the basis consistency reports. The regulations also establish penalties for inaccurate basis reporting and failures to furnish correct statements.

 Generally, Form 8971 must be filed with the IRS no later than 30 days after the estate tax return is due or filed and is required to be filed separately from the estate tax return. Effective March 23, 2016, the IRS announced that additional time will be granted to estates currently required to file Form 8971 and delayed the time to file and furnish the statement to beneficiaries until June 30, 2016.

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Estate Planning under 2010 Tax Relief Act

Estate Planning Under the Tax Relief Act of 2010

            In the final hours of 2010, Congress passed the Tax Relief Act of 2010.  As part of that act, the estate tax continues for two more years with an exemption level of $5 million and a maximum tax rate of 35%.

            The key issue is that the extension is only for two years.  The possibilities as of January 1, 2013 include (a) possible total repeal; (b) the 2011 and 2012 rules become permanent; (c) we have an ultimate sunset and return to the $1 million exemption level.  Personally, I am making no predictions on this round. 

            Planning in 2011 creates both opportunities and pitfalls.  Key planning opportunities are as follows:

            $5 million exemption for estate and gift taxes.  For 2011 and 2012, we return to a unified credit for estate and gift taxes. Any donor (or later decedent) can transfer up to $5,000,000 to his or her heirs gift and estate tax free.    

            For those individuals with assets well in excess of $5,000,000, the law presents an opportunity to consider aggressive lifetime gifts. The caveat of many advisors is a concern as to what will happen if there is a return to the $1 million dollar level.  For those with an estate in the vicinity of the exemption amount, consideration must be given to whether there will be more benefit from a step-up in basis, which results with an at death transfer, than there will be from a lifetime gift.

            With respect to any estate plan, the higher exemption amount creates the opportunity to focus more on desired disposition of assets rather than avoiding estate taxes.  Income tax planning becomes a more significant factor than estate tax planning.

            Portability of exemption.  The law allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse. That is, if the first spouse to die has an estate of $2 million dollars, such spouse’s unused exemption will be $3 million dollars. That exemption can be passed to the surviving spouse, who then has an $8 million dollar exemption.

            While some commentators view the portability of the exemption as a panacea and eliminating the need for trusts, my view is that the portability simply offers added flexibility but has limited usefulness in estate plans of those who have been married more than once and/or have children from various marriages.  Even in the cases of first marriages, the available unused exemption is limited to the unused exemption of the most recent deceased spouse.  Thus, if the surviving spouse remarries and is predeceased by her new spouse, the available transferred unused exemption will be that of the later spouse.

            My recommendation.   For the next two years, I am not recommending dramatic changes to estate plans. I do recommend review. Most should review current disposition structure and consider whether there are any short term planning opportunities under the law as it exists for two years.

Phishing

Some internet scam artists send out emails regarding “refunds.”  The IRS does not initiate unsolicited email with taxpayers.  If you receive an unsolicited email regarding a refund, forward the email to phishing@irs.gov.

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