New Law Adds Estate Reporting Requirement and Requires Beneficiaries To Use Estate Tax Value as Basis

August 31, 2015Articles Estate Planning Blog

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which was signed by President Obama on July 31, includes a provision that increases the compliance burden for many estates. The new law provides that estates that are required to file an estate tax return must separately report to the IRS, and to each estate beneficiary, the estate tax value of the property to be received by the beneficiary. The statement must be sent by the earlier of 30 days after the date the estate tax return is required to be filed or the date the return is filed. This reporting requirement is effective for property included on any estate tax return filed after July 31, 2015. The IRS, in Notice 2015-57, which was issued on August 21, has provided a delayed implementation date. All statements for returns that are due after July 31, 2015, are not due until February 29, 2016. This should give the IRS ample time to provide guidance on the statements.

This new reporting requirement only applies to estates that are required to file an estate tax return. It is unclear whether the new reporting requirement applies to estates that file an estate tax return solely to elect portability.

In addition to the new reporting requirement, estate beneficiaries must treat their tax basis in property received from an estate that paid estate tax consistently with the estate tax return value. If a beneficiary does not comply, the new law provides for a potential 20 percent accuracy-related penalty on the understated tax due to any inconsistent basis treatment. The aim of this provision is to end a loss of revenue for the government based upon a basis mismatch. For example, many estates report the value of privately held business interests at up to 40 percent less than their book value as a result of discounts for minority interests and lack of marketability. When the beneficiaries sell the same interests in the future, they are reporting the higher book value as their basis that they received from the estate. As a result, the government loses out on the gain between the discounted value and the book value. This provision is an attempt to remedy this.