By Trust and Estates Attorney Kerri Castellini
On July 31, 2015, H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 was signed into law. A provision of the bill that has caused great anxiety among estate planners and accountants was a requirement that executors or personal representatives of an estate that is required to file a Federal estate tax return, supply both to the Secretary and to the recipient, a statement that reports the value of the property as reflected on the return.[i] The purpose of the provision is to achieve consistency between the value of inherited property and the property as reported on a Federal estate tax return. [ii]
When the American Tax Payer Relief Act, Pub. L. 112-240, H.R. 8, was passed by Congress on January 2, 2013, the act allowed for beneficiaries to receive a “step-up” in basis for inherited assets. For example, if an individual bought real estate in 2010 for $100,000 and died in 2016 when the property’s fair market value was $500,000, his beneficiary would receive the asset at the $500,000 basis. If the real estate was sold the day after its receipt by the beneficiary for $550,000, the beneficiary would only be subject to capital gains tax on $50K.
Using the same example, but changing the outcome, if the owner lived and sold his own real estate in 2016 for $550,000, the owner would be subject to capital gains tax for $450,000. The step-up in basis is a significant benefit for beneficiaries of estates. Commonly forgotten however, a “step-down” in basis would be required in the event that that an asset’s fair market value was lower than the decedent’s initial cost basis.
A step-up in basis is currently only available to assets passed as result of a death of the owner. Assets that are gifted by the owner during his lifetime to a beneficiary receive a carry-over basis, meaning, the recipient of the gift takes the same original basis of the giftor. Using the example from above, if the same owner gifted his real estate to a recipient; the basis for the real estate would remain $100,000.
The proposed regulations provided by the I.R.S. on March 2, 2016, clarify that the report required by the new law is due no later than the earlier of 30 days after the due date of the return or 30 days after the date the return is actually filed.[iii] Although the act became effective immediately, the I.R.S. has delayed the deadline for filing of the report several times. Recently the I.R.S. again delayed the deadline for those required to file until June 30, 2016.
The consistent basis reporting requirement only applies to property in which inclusion in the decedent’s gross taxable estate would actually result in an increase in the Federal estate tax liability. The proposed regulations exclude all property reported on a federal estate tax return required to be filed if there is no Federal estate tax liability as a result of allowable credits.[iv]
The proposed regulations also address a concern expressed by commenters that the new basis reporting requirement would interfere with an individual’s availability to adjust the basis of property as a result of post-death events. The proposed regulations state that the adjustments will not violate the new requirement, but rather require only that the recipient’s initial basis be consistent with the value reported for Federal estate tax purposes.
Currently, most states have not reacted to the new Federal law and incorporated basis reporting requirements for estates that although not required to file a Federal estate tax return because the gross taxable estate is below the Federal estate tax filing threshold, are required to file a state estate tax return.
[i] https://www.irs.gov/irb/2015-36_IRB/ar12.html
[ii] https://www.regulations.gov/#!documentDetail;D=IRS_FRDOC_0001-1427
[iii] https://www.regulations.gov/#!documentDetail;D=IRS_FRDOC_0001-1427
[iv] https://www.regulations.gov/#!documentDetail;D=IRS_FRDOC_0001-1427