Form 8971 and Instructions Issued – How Do They Apply to Portability-Only 706 Filings?

February 4, 2016Articles Estate Planning Blog

Earlier this week, the IRS issued final Form 8971 and the related Instructions. The form is used to report the final estate tax value of property distributed from an estate. The purpose of the form is to help the IRS enforce the new "basis consistency" requirements of Section 1014(f).

As previously reported, an unanswered question under the new law is whether a 706 filing solely for the purpose of electing portability triggers a Form 8971 filing requirement. If any property passes from the decedent to someone other than a spouse, it makes sense that the non-spouse recipient should receive a Form 8971. But, what if all of the decedent's property is distributed to a surviving spouse? Unfortunately, the instructions don't provide an answer. Until the IRS issues a definitive statement on the issue, it seems prudent to file the form as a precautionary measure in all "portability-only" 706 filings.

How do you complete Form 8971 for a surviving spouse if you filed a portability-only 706 by estimating the value of the gross estate as permitted under Treasury Regulations §20.2010-2(a)(7)(ii)? Column E of Part 2 of Schedule A on Form 8971 requires the executor to report the estate tax value of each item of property received by each beneficiary. However, when you use this alternate method for completing Form 706, you don't ascribe a value to each item of property included in the gross estate if that item qualifies for the marital deduction. Instead, the regulations permit an executor to list each item of property in the gross estate on the appropriate schedules, without attributing a value to each item. The executor then estimates the cumulative value of the gross estate and reports that value on Line 1 of Part 2 on Form 706. This reduces the cost of the filing by obviating the need for appraisals and date of death valuations.

The logical answer to this open question would seem to be that an executor is not required to issue Form 8971 to a surviving spouse in a portability-only 706 filing. Section 1014(f)(2) states that the basis consistency rules apply only to property whose inclusion in the gross estate increases the estate's liability for federal estate tax (reduced by credits allowed against the tax). Generally, property that qualifies for the marital or charitable deductions will not generate an estate tax. If the basis consistency rules don't apply to property qualifying for the marital deduction and the purpose of Form 8971 is to help enforce the basis consistency rules, then we shouldn't need to issue the form to a surviving spouse when filing a portability-only Form 706.

Hopefully, the soon to be released regulations will provide some clarity.