Are you the executor of an estate and previously have filed or will file an estate tax return (Form 706) after July 31, 2015? If so, grab a cup of coffee, and let’s talk about a new filing requirement. Estate executors who are required to file Form 706 will report the basis of the estate’s assets via the newly released Form 8971 and will provide the accompanying Schedule A to beneficiaries. Form 8971 and its filing instructions were made available as of January 29, 2016.
Why New Reporting Is Required
Upon the death of a taxpayer, an asset which transfers to his or her beneficiaries generally will receive a step up in tax basis to the asset’s fair market value. For example, assume the decedent purchased a home for $50,000 in 1975. On the date of death, the home had a fair market value of $300,000. At the time of transfer, the beneficiary’s basis in the home becomes $300,000, not the original $50,000 basis in the property prior to the date of death.
Keeping up with this new basis at the date of death has been difficult for a variety of reasons. Most notably, in many cases, the transferred property is not immediately sold by the beneficiary. This delay makes basis reporting difficult in later years. Therefore, the purpose of this new form is to encourage consistent basis reporting for property passing from the estate to a beneficiary. A beneficiary’s basis in property acquired from an estate will now be considered established with the filing of Form 8971. It is this reported basis amount that the beneficiary should use when determining gain or loss on a future sale of the property.
Who’s Required to File
All estates that are required to file Form 706 after July 31, 2015, also are required to file Form 8971. The same is true on the flip-side: estates that are not required to file Form 706 also are not required to file Form 8971. The instructions specifically exclude from this new filing requirement those estates that file Form 706 solely to make a generation-skipping transfer tax election. However, the instructions did not address estates that otherwise would not be required to file Form 706, but chose to file only to elect portability of a deceased spousal unused exclusion.
When to File
Form 8971 is an informational return to be filed within 30 days of the filing date of the decedent’s estate tax return (Form 706). Since Form 8971 was just released in January 2016, estates that filed Form 706 after July 31, 2015, have been granted additional time by the IRS. These estates should file Form 8971 by March 31, 2016, or 30 days after the filing of Form 706, whichever is later.
While we expect further guidance to be issued throughout the year, questions still remain surrounding who must file Form 8971. Every current or future estate executor could be affected by these new filing requirements. If you need assistance determining if this new filing requirement applies to you, contact a related author listed below at PYA, (800) 270-9629.
