Long awaited relief from the Proposed Regulations issued in 2016 finally arrived in September 2024 via the Final Regulations for the reporting requirements regarding estate tax basis consistency. As some may recall, the proposed regulations imposed a requirement for executors of certain estates to report the estate tax value of inherited assets not only to the IRS but to the recipient beneficiaries as well. While the filing requirement still exists, certain provisions of the Proposed Regulations have been either eliminated or made less burdensome for taxpayers and practitioners. The following are some of the important changes:
Thirty-day Reporting Deadline
Proposed rules – The executor of an estate is required to file Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, with all relevant Schedule(s) A with the IRS by the earlier of 30 days after the due date, including extensions of the estate tax return or 30 days after the return is filed. Schedule A is also required to be provided to the respective beneficiaries by this same date. (The face of Form 8971 reports the beneficiary information while Schedule A reports the details, including the estate tax value of each item inherited by the respective beneficiary.)
In many cases, it was not known what assets would be going to which beneficiaries by the time of the Form 8971 filing due date. All assets that could potentially be distributed to a beneficiary to satisfy their interest in an estate had to be reported on the Schedule A. This reporting was burdensome, created confusion for the beneficiaries receiving the Schedule A and created some privacy issues as well due to beneficiaries receiving information about assets that they ultimately would not be getting from the estate.
Final rules – Executors now only have to report property actually distributed before the 30-day deadline on the Form 8971 and Schedule(s) A filed by that date. Any distributions of property made after that date can be reported on a supplemental Form 8971 and Schedule A by January 31 of the year following the year of the distribution. An executor also has the option of issuing a Schedule A to a beneficiary who the executor reasonably believes will be acquiring the property. If the reported property ultimately is acquired by a different beneficiary, the executor must update Form 8971 and Schedule(s) A.
Subsequent Transfer Rules
Proposed rules – Estate beneficiaries who subsequently gift property inherited from an estate to a “related transferee” must report the basis on Schedule A to the gift recipient. In addition, trustees of trusts that inherit property from an estate and then distribute that property to a trust beneficiary must report the basis to the IRS and the trust beneficiary.
Final rules – Individuals are no longer subject to the basis consistency reporting requirements for gifts made of inherited property. Trustees must still adhere to the reporting requirements. The due date for filing Form 8971 and Schedule(s) A is January 31 of the year following the year of the property distribution.
Zero-basis Provision
Proposed rules – If an asset is omitted from the filed estate tax return, then its basis is presumed to be zero.
Final rules – The zero–basis provision has been eliminated, but the IRS can still pursue intentional omissions of assets from an estate tax return for fraudulent purposes.
The proposed provisions were unduly harsh, considering they did not provide exceptions for inadvertent omissions, and the persons being penalized with the zero basis were the beneficiaries of the assets who may not have had any involvement in the estate tax return preparation.
Overall, the wait was worth it for the changes to the estate tax basis consistency reporting requirements that the Final Regulations contain. Thankfully, complying with these requirements will be less burdensome going forward. Please contact your WG advisor if you have questions or require further information.
