Presenting a live 90-minute webinar with interactive Q&A
Estate Basis Consistency Rules for Fiduciaries:
Navigating Reporting Requirements
and Distribution Strategies
Avoiding Penalties, Determining Impact of Disclosure Rules On Estate and Beneficiaries
TUESDAY, FEBRUARY 7, 2017
1pm Eastern
|
12pm Central | 11am Mountain
|
10am Pacific
Today’s faculty features:
Christiana Lazo, Counsel, Ropes & Gray, New York
Nelson H. Hunt, Of Counsel, Bisignano Harrison Neuhoff, Dallas
Abigail E. (Abby) O'Connor, Senior Counsel, Holland & Knight, Anchorage, Alaska
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ESTATE BASIS CONSISTENCY
RULES FOR FIDUCIARIES
Christiana M. Lazo
Ropes & Gray
1211 Avenue of the Americas
New York, NY 10036-8704
1-212-596-9506
[email protected]
IRC § 1014: Basis Consistency Rules
• IRC § 1014(f)(1): Basis of property
acquired from a decedent “shall not
exceed” the “finally determined” estate tax
value of the property;
• Goal: Ensure consistent reporting of estate
tax value and basis of property in the
hands of recipient;
ROPES 6
& GRAY
Estates Subject to the Basis
Consistency Rules
• Estates with a federal estate tax liability
(Prop. Reg. Section 1.1014-10(b)(3);
• No federal estate tax liability, not subject
to basis consistency rules.
ROPES 7
& GRAY
Property Subject to the Basis
Consistency Rules
• Generally, all property other than excepted
property:
– Property included in the gross estate under IRC §
2031;
– Property subject to tax under IRC § 2106; and
– Other property the basis of which is determined,
in whole or in part, with reference to the basis of
property referenced above which generates a tax
liability.
ROPES 8
& GRAY
Property Not Subject to the Basis
Consistency Rules
• Excepted property:
– Property qualifying for an estate tax charitable or
marital deduction under IRC Sections 2055, 2056
or 2056A (Prop. Reg. Section 1.1014-10(b)(2));
– Tangible personal property for which an appraisal
is not required under Treas. Reg. Section
20.2031-6(b) (Prop. Reg. Section 1.101410(b)(2));
• Treas. Reg. Section 20.2031-6(b) requires an appraisal for
“household and personal effects articles having marked artistic or
intrinsic value of a total value in excess of $3,000 (e.g., jewelry, furs,
silverware, paintings, etchings, engravings, antiques, books,
statuary vases, oriental rugs, coin or stamp collections)[…]”
ROPES 9
& GRAY
Final Value Determination Methods
• Value reported on the estate tax return once the
period of limitations on assessment has expired;
or
• Amount determined by the IRS once it can no
longer be contested; or
• Amount determined in an agreement binding on
all parties; or
• Value determined by a court once the court’s
determination is final.
IRC § 1014(f)(3)(A)-(C) and Treas. Reg.
1.1014-10(c)(1)
10& GRAY
ROPES
Zero Basis Rule and Other Tax Consequences
Due to Omission/Non-Reporting
• Report on amended return within the statute
of limitations period, “normal” final value rules
apply (Prop. Reg. Section 1.101410(c)(3)(i)(A));
• Don’t report on amended return within the
statute of limitations period, zero basis (Prop.
Reg. Section 1.1014-10(c)(3)(i)(B)).
11& GRAY
ROPES
ESTATE BASIS CONSISTENCY
RULES FOR FIDUCIARIES
Nelson H. Hunt
Bisignano Harrison Neuhoff
5949 Sherry Lane, Sterling Plaza
Suite 770, Dallas, TX 75225
[email protected]
Form 8971 Chronology:
• July 31, 2015: Congress adds IRC §§ 6035 and
1014(f). P.L. No. 114-41.
• January 29, 2016: IRS publishes Form 8971.
• March 4, 2016: Treasury issues Prop. Treas.
Reg. § 1.6035-1.
• March 23, 2016: IRS issues Notice 2016-27
(pushing earliest filing deadline to June 30,
2016).
14
Who is required to file Form 8971?
• Estate that is required to file an estate tax
return, and such return is filed after July 31,
2015. IRC § 6035(a)(1).
15
Who is not required to file Form 8971?
• Estate that files an estate tax return solely to:
– elect portability.
– make a generation-skipping transfer tax
exemption.
– as a protective filing to avoid penalties in the
event of changes in asset values. Prop. Treas. Reg.
§ 1.6035-1(a)(2).
16
When am I required to file Form 8971?
• 30 days after the earlier of (1) the deadline for
filing the federal estate tax return, or (2) the
date the return is actually filed. Prop. Treas.
Reg. § 1.6035-1(d)(1).
• If otherwise required to file before June 30,
2016, then June 30, 2016 was the deadline.
Notice 2016-27.
17
When am I required to issue Schedule A?
• Same deadline as filing Form 8917.
• See Notice 2016-27.
18
Who may file Form 8971?
• Executors, administrators, and in some cases,
beneficiaries. Prop. Treas. Reg. § 1.60351(g)(1); IRC §§ 2203, 6018(b).
19
Form 8917:
20
Schedule A
21
What assets must be included?
• All assets required to be reported on the
estate tax return. Prop. Treas. Reg. § 1.60351(b)(1).
22
What assets do not have to be included?
• Cash.
• Income in respect of a decedent (IRD).
• Tangible personal property for which an
appraisal is not required (see Treas. Reg. §
20.2031-6(b)).
• Assets disposed of by the estate in a taxable
transaction before the filing of Form 8971.
Prop. Treas. Reg. § 1.6035-1(b)(1).
23
Who must receive Schedule A?
• All beneficiaries of the estate. IRC §
6035(a)(2).
24
When am I required to file a
supplemental Form 8971?
• A contingency negates the inheritance of a
beneficiary to whom schedule A was issued.
Prop. Reg. § 1.6035-1(c)(1).
• An executor locates a beneficiary after filing Form
8971 and issuing Schedules A to other
beneficiaries, if any. Prop. Treas. Reg. § 1.60351(c)(4).
• There is an “adjustment” to the information
required to be reported. Prop. Treas. Reg. §
1.6035-1(e)(1), (2).
25
What if a beneficiary makes a subsequent
transfer of the property?
• If by sale to an unrelated third party, then no
supplemental filing is necessary.
• If by gift to a related person (or any transfer
resulting in carryover basis), then within 30
days of the transfer, the beneficiary must file a
supplemental Schedule A with the IRS. Prop.
Treas. Reg. § 1.6035-1(f).
• The beneficiary must furnish a copy of the
supplemental Schedule A to the transferee.
26
Penalties?
• Failure to file Form 8971: $250 per statement,
reduced by $50 per statement if the error is
corrected within 30 days of the due date. IRC
§§ 6724(d)(1)(D) and 6724(d)(2)(II); see IRC §§
6721(a)(1), (b)(1), 6722(a)(1), (b)(1).
• Penalties may be waived in certain cases of
corrected late filings. See IRC §§ 6721(c)(1)(C),
6722(c)(1)(C).
27
Estate Basis Consistency
Rules for Fiduciaries – Part III
Abby O’Connor, Holland & Knight LLP
601 W. Fifth Ave, Suite 700, Anchorage, AK
907.263.6330
[email protected]
Strafford Continuing Education Webinars
February 2, 2017
Copyright © 2014 Holland & Knight LLP. All Rights Reserved
Brief Outline
»Impact of New Rules on
Beneficiaries
»Distribution Considerations
& Strategies
30
Impact of New Rules on Beneficiaries
»Subsequent transfers to related transferees
– New liability on beneficiaries
– No reporting requirement for transfer to non-grantor
trust?
– 1.6035-1(f) (emphasis added):
•
For purposes of this provision, a related transferee means any member of
the transferor’s family as defined in section 2704(c)(2), any controlled entity
(a corporation or any other entity in which the transferor and members of
the transferor’s family (as defined in section 2704(c)(2)), whether directly or
indirectly, have control within the meaning of section 2701(b)(2)(a) or (b)),
and any trust of which the transferor is a deemed owner for income tax
purposes.
31
Impact of New Rules on Beneficiaries
»Sale of Asset Before Value is Final
– Audit  Increase in value of asset  Increase in
basis  Decrease in Tax
– Zero basis rule? YIKES!!!!
• Disastrous tax results
• No fault of the beneficiary
• No control by the beneficiary
32
Impact of New Rules on Beneficiaries
»Sale of Asset Before Value is Final
– Timing? Statute of limitations? Scary example:
• Person dies 1/1/17.
• Asset distributed to beneficiary soon afterwards.
• Beneficiary sells asset on 6/1/17.
• Reports sale on tax return 4/15/18. Statute runs on 4/15/21.
• Estate tax return is filed on 3/1/18. Statute runs on 3/1/21 –
BUT THERE IS AN AUDIT ON 2/1/21 regarding the value of
that asset – not resolved until 2/1/22 – after the statute ran
on the beneficiary’s tax return.
• ??????? Maybe this will be fixed in the final Regs????
33
Impact of New Rules on Beneficiaries
»Confusion with Residuary Gifts
– All potential assets for distribution listed on
Statement
– Which assets are mine?
– But I want THAT asset!
– Compare with state-required trust/estate accounting
– is the information owed anyway?
– Will this be fixed in the final Regs???
34
Distribution (and Other) Considerations
& Strategies
»Obtaining taxpayer ID information from beneficiaries
– New instructions – If the personal representative
requested the beneficiary’s tax ID in writing and
hasn’t received a response, enter “requested” in
Column B of Part II of Form 8971. Once received,
file supplemental.
»Strategies
»Include question on intake form
»Get EARLY from beneficiaries!!!
35
Distribution (and Other) Considerations
& Strategies
» Keeping Track of Beneficiaries
– Supplemental reporting requirements
» Strategies
– Advise fiduciaries of ongoing obligation – until
values of “final”
– Notify beneficiaries early on of need for changes in
address and contact information
36
Distribution (and Other) Considerations
& Strategies
» Successor Trustees
– Sorting out assets subject to new rules
» Strategy
– Checklist for trustees accepting new roles:
• Is there a Schedule A?
• If so, is the value final?
37
Distribution (and Other) Considerations
& Strategies
» What if beneficiary receives only cash or proceeds of sold property?
– Those assets are not required to be listed on a Statement (Schedule
A)
– Proposed Reg. 1.6035(a)(1) (emphasis added):
This executor also must furnish a Statement (defined in paragraph
(g)(3) of this section) to each beneficiary who has (or will) acquire,
whether from the decedent or by reason of the death of the decedent,
property reported on the Information Return to identify the
property the beneficiary is to receive and to report the value of that
property and other information prescribed by the Statement and
instructions thereto.
– Information return = 8971 = no items reported on that page. Error?
» HK Strategy: file a Statement (Schedule A) that effectively is blank, with
explanation. Hopefully the final Regs will provide clarification.
38