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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Using Intra-Family Loans to Transfer Wealth

Intra-family Loans can be a great opportunity for families to give their children or relatives additional funds, or if a relative is looking to make a significant purchase, a relative can borrow from a member of the family at a much better rate than going to a financial institution. Most individuals are familiar with the idea of making gifts to their children or relatives of an amount below the annual gift exclusion of $14,000, but those seeking to make transfers to their family that exceed the annual exclusion should be considering intra-family loans because of current low interest rates.

If making such a loan, the loan should be properly documented and interest must be charged and paid. If these requirements are not met, the Internal Revenue Service (“IRS”) may recharacterize the loan as a gift. If treated as a gift, the loan will reduce the lender’s gift and estate tax exemption or may cause the gift to be taxed at the current gift tax rate of 40%. It is recommended that the loan be documented with a promissory note and a fixed payment schedule. An interest rate equal to or above the Applicable Federal Rate (AFR) must be charge on the loan. The AFR will depend on the length of the loan. For loans with an annual compounding interest, the January interest rates are as follows: short-term (< 3 years): .56%; mid-term (3-9 years): 1.68%; and long-term (> 9 years): 2.61%. The recommended length and structure for repayment of the loan will likely depend on the AFR at the time of the loan, the financial needs of the lender, and the funds available to the borrower.

As an example of the effectiveness of such a loan, Parent makes a loan to Child for $500,000 and Child invest such funds with an annual return of 5%. If the loan is for a term of 9 years with a balloon payment at the end of such time, the applicable January mid-term rate would be 1.68%. At the end of the 9 year period, Child would have $775,664. The payment due on the loan would be $580,885. Child nets $194,779. Parent would be required to report the amount of interest, $80,885, as interest income.

While current rates remain low, it is likely that the rates will increase over the course of 2016. If you want additional information or would like to take advantage of the current interest rates, contact the attorneys at Vandenack Williams LLC.

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For more information, Contact Us