When someone inherits assets, he or she is supposed to have a tax basis in the inherited asset for income tax purposes equal to the “fair market value” of the inherited asset at the date of death. The IRS is concerned that it is losing billions of dollars due to improper basis reporting for inherited assets: that is, the executor reports the assets on the estate tax return at one value, and then when those same assets are later sold, exchanged, or transferred by the beneficiary, the beneficiary reports the basis at a higher value. To tackle this concern, all estates which file an estate tax return after July 31, 2015, also must now file, within 30 days after filing the estate tax return, new IRS Form 8971, and provide a Schedule A to each beneficiary. A beneficiary’s Schedule A must also be given to the beneficiary within the same time frame. (Note that for all estate tax returns filed between August 1, 2015 and May 31, 2016, the due date of Form 8971 was postponed to June 30, 2016, leading to a flood of recent filings.)
So if you are the beneficiary of an estate required to file the new Form 8971 and you have just opened your mailbox to the wonderful surprise of a Schedule A to Form 8971, here are four things you need to know about this exciting new Schedule A:
- This Schedule is important; do not ignore it. Give your Schedule A to your tax advisor.
- Your Schedule A may not tell you exactly what you are inheriting.
- You may be receiving more than what your Schedule A reports. Certain assets are not included in the Schedule A. Cash is not included. Most retirement plan assets are not included. Certain tangible personal property is not included. Assets sold by the executor after death generally are not included.
- Conversely, you may not receive all of the assets listed on your Schedule A. Most estates are not completely distributed within 30 days after the filing of the estate tax return. Therefore, it is highly likely that your Schedule A will contain the entire universe of assets (requiring a basis report) that you could receive. Assume you are a 50% beneficiary of an estate and your sibling is the other 50% beneficiary. Your Schedule A may show 100% of the assets, since the executor/trustee likely has not yet determined which assets will actually make up your 50%.
- Schedule A tells you your basis. Upon distribution, it would be wise to review your Schedule A, and note each asset you actually receive. For each asset you receive, look to Column E. When you later sell, exchange, or dispose of an inherited asset listed on your Schedule A, that number in Column E is the basis you must start with. NOTE – an understatement of gross income due to an overstatement of basis is an omission from gross income and subject to a six year statute of limitations. So please, take this Column E seriously and consult with your tax advisor.
- By receiving a Schedule A, you are now a proud participant in the Subsequent Transfer Rule. In general, if you transfer an inherited asset that was reported on your Schedule A other than by selling it (for example, you transfer it by gift to a family member or you transfer it to your corporation or your living trust), then within 30 days after the transfer, you must provide the IRS and the transferee with a Schedule A (even if you are the trustee of your own living trust or the only shareholder in your corporation).
The 30 day reporting requirement is applicable even if the initial Form 8971 has not yet been filed – for instance, if an asset is transferred to a beneficiary and subsequently transferred by that beneficiary before the Form 8971 is due 30 days after the estate tax return is filed. Yes, you read this right, and it’s not an uncommon occurrence.
There has been a lot of confusion and unhappiness surrounding the initial filings of Form 8971 and its Schedule A (and likely more to come as the IRS reviews the first batch of filings, as there are a lot of details not covered by this post which are causing concern and difficulty).