Basis of Assets Inherited
Decedent Died in 2010
Under the Tax Act of 2010, the estate tax was retroactively reinstated for 2010 with an exception for 2010 permitting an election to choose no estate tax and a modified carryover basis for inherited assets. If the no estate tax election was chosen, the basis of the inherited property will be determined by a complicated formula and the basis must be provided by the executor of the estate. Most likely, for estate’s valued at less than $5 million, the executor will have opted for the estate tax and step up/down basis rules rather than the modified carryover basis method. Consult the estate executor if in doubt.
Decedent Died in Other Than 2010
(Or the “no estate tax” provision was not elected for a 2010 death) – Generally, a beneficiary who inherits an asset is allowed to use the asset's fair market value on the date the deceased owner died as his or her tax basis in the asset. This is commonly referred to as the "step-up or step down” basis. (Sometimes an alternate valuation, determined as of the date six months after the date of death, is used – but this method is allowed only if doing so reduces the total value of the estate and estate tax is paid.) Note: Basis adjustment does not apply to items that would have been taxable to the deceased as income such as Traditional IRAs, pensions, instalment notes, etc.
Inheriting a Prior Gift
Can an individual who inherited property in turn gift the property to someone, and then when that person passes, inherit it back and receive a new stepped-up basis?
Yes, but per Sec 1014(e), the recipient of the gift will have to hold the property for a period of one year before he or she dies for the gift-giver to get a basis adjustment. Note that the basis is a two-way street. Could be step down as well as step up. A gift tax return, Form 709, will need to be filed if the value of the property given exceeds the current gift tax exclusion allowance ($16,000 in 2022; will increase to $17,000 in 2023).
Sec 1041(e) Appreciated property acquired by decedent by gift within 1 year of death
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(1) In general, In the case of a decedent dying after December 31, 1981, if —
(A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and
(B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor),the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.
Example - Dad purchased stock for $5,000. Son inherited the stock when Dad died, at which time the FMV of the stock was $6,000. Son gifts the stock to Mom when the value of the gift is $6,000, and that’s his only gift to her in that year. No gift tax return was required because the value was below the gift tax exclusion amount. Mom dies two years later when the FMV of the stock is $8,000 and wills the stock to Son. Since Mom held the stock for more than one year, Son’s basis in the inherited stock can be stepped up to $8,000. If the stock had been worth $4,000 when Mom died, Son’s inherited basis would be $4,000.
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Inherited Property Basis Consistency
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 imposed a new basis consistency standard – in general, the basis of property received by reason of death under Code Sec. 1014 must equal the value of that property for estate tax purposes. This basis consistency rule only applies to a property whose inclusion in the decedent's estate increases the estate's federal estate tax liability (reduced by credits allowable against such tax). (Code Sec. 1014(f)(2)) It applies whenever the beneficiary reports to the IRS a taxable event with respect to the property and continues to apply until the property is sold, exchanged, or otherwise disposed of in one or more transactions that result in the recognition of gain or loss. (Prop. Reg. §1.1014-10(a)(1)) This provision does not apply to property that is disposed of prior to distribution to beneficiaries or income in respect of a decedent. (Prop. Reg. §1.6035-1(b))
Effective for property with respect to which an estate tax return is filed after July 31, 2015, the basis of any property to which Code Sec. 1014(a) applies (i.e., the rules for determining basis of property acquired from a decedent), can't exceed:
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In the case of property, the final value of which has been determined for purposes of the tax imposed by estate tax on the estate of the decedent, such value, and
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In the case of property not described in (A), above, and with respect to which a statement has been furnished under new Code Sec. 6035(a) (see basis reporting below) identifying the value of such property. (Code Sec. 1014(f)(1), as amended by Act Sec. 2004(a))
For purposes of Code Sec. 1014(f)(1), the basis of property has been determined for purposes of the estate tax if:
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The value of such property is shown on a return required under Code Sec. 6018 (i.e., an estate tax return filed on Form 706, 706-NA, or 706-A) and that value is not contested by IRS before the expiration of the time for assessing a tax under the estate tax rules;
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In a case not described in (A), above, the value is specified by IRS and that value is not timely contested by the executor of the estate; or
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The value is determined by a court or pursuant to a settlement agreement with IRS.
IRS may by regulations provide exceptions to the application of Code Sec. 1014(f).
Inherited Basis Information Reporting
The information reporting requirement is designed to ensure that the basis consistency standard is met.
Under the Act, effective for property with respect to which an estate tax return is filed after July 31, 2015, the following information reporting requirements apply to inherited property (Code Sec. 6035(a), as added by Act Sec. 2004(b)(1)):
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The executor of any estate required to file a return under Code Sec. 6018(a) must furnish to IRS and to each person acquiring any interest in property included in the decedent's gross estate for Federal estate tax purposes a statement identifying the value of each interest in such property as reported on the estate tax return and such other information with respect to such interest as IRS may prescribe.
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Each person required to file a return under Code Sec. 6018(b)(returns by certain beneficiaries) must furnish to IRS and to each other person who holds a legal or beneficial interest in the property to which such return relates a statement identifying the information described in (1), above.
The statements required under (1) and (2), above, must be furnished as prescribed by IRS, but not later than the earlier of the date which is:
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30 days after the date on which the estate tax return was required to be filed (including extensions, if any), or
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30 days after the date the estate tax return is actually filed. (Code Sec. 6035(a)(3)(A))
Form 8971
In proposed regulations, the IRS has designated Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and its Schedule A, as the statement an executor is to use to satisfy the reporting requirements. Form 8971 is a separate filing requirement from the estate’s Form 706, 706-NA, or 706-A, and should not be attached to the respective estate tax return. Where there is an adjustment to the information required to be included on the 8971 and/or Schedule A after it has been filed, a supplemental 8971 and Schedule A must be filed not later than the date which is 30 days after the adjustment is made (Code Sec. 6035(a)(3)(B)).
Schedule A of Form 8971
All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary's Schedule A. If the executor has not determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary's distribution on that beneficiary's Schedule A. (This means that the same property may be reflected on more than one Schedule A.) A supplemental Form 8971 and corresponding Schedule(s) A should be filed once the distribution to each such beneficiary has been made.
Other issues associated with filing the Schedule A:
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Generally, any property that qualifies for a marital deduction or a charitable deduction will not generate estate tax, and "No" should be indicated in Column C of the Schedule A.
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A form or schedule filed with IRS without entries in each field will not be processed. A form with an answer of "unknown" will not be considered a complete return.
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The executor is to provide each beneficiary only with their own Schedule A, not those of other beneficiaries.
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Beneficiaries could conceivably receive revised Schedule As years after their original returns were filed if the IRS examines the estate tax return, does not agree with the FMV claimed on that return and the executor chooses to litigate the issue.
Since the executor of the estate must certify that copies have been provided to all beneficiaries it would be prudent for the executor to retain a proof of mailing, proof of delivery, acknowledgment of receipt, or other information relevant for the estate's records.
Failure to File Penalty
Failing to follow the information reporting requirements is subject to the failure-tofile penalty of $290 for returns required to be filed in 2023 ($280 for 2022 or 2021; $270 for 2020 or 2019; $260 for years 2015-2018), per return (Code Sec. 6721(a)). The 8971 and the Schedule A are considered a single filing for purposes of the penalty.
Inconsistency Penalty
Beneficiaries who report basis in property that is inconsistent with the amount on the Schedule A may be liable for a 20% accuracy-related penalty under Code Sec 6662. However, adjustments to the basis of property post-death, such as capital improvements, will not cause a beneficiary to be subject to the accuracy-related penalty if the basis of property claimed on a return exceeds its final value as determined under Code Sec. 1014(f). (Prop. Reg. §1.1014-10(a)(2))
8971 Not Required if 706 Filed Just to Make Portability Election
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Prop. Reg. 1.6035-1(a)(2) states that the Form 8971 filing requirement does not apply to estate tax returns filed solely for the purposes of making a portability election (or a generation-skipping transfer tax election or exemption allocation). When the proposed regs are published as final in the Federal Register, they will apply to property acquired from a decedent or by reason of the death of a decedent whose required estate tax return is filed after July 31, 2015. These rules may be relied on before the date of publication of the Treasury Decision adopting these rules as final in the Federal Register.