The recently enacted stop-gap Highway Bill opened up a pothole in the estate administration path of executors for many estates. What does building highways have to do with estate administration? Nothing at all. But bill scorers in Washington D.C. deemed that including provisions in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 requiring “consistency in basis reporting” would generate $1.5 billion in revenue over 10 years to help pay for the Bill. Thus, new sections to be added to the Internal Revenue Code that place new obligations on executors relating to basis reporting were included in the Bill that was signed by the President on July 31, 2015, with an immediate effective date. The new provisions raise plenty of questions and leave executors who may be required to comply with it by August 30 of this year wondering exactly what they are supposed to do.
It has been the law from the time that the modern federal estate tax was enacted in 1916 that a person who receives property from a deceased person takes a basis in that property equal to the fair market value of the property on the date of the decedent’s death, subject to certain exceptions. In the ideal situation, the property’s new basis is “stepped up” to the fair market value, so if immediately sold for fair market value, there would be no gain on that sale. The new law does not change that, but fixes what Congress apparently perceives as a problem, that beneficiaries of estates exceeding the filing threshold for estate tax returns are selling inherited property and treating the basis in such property as being greater than its fair market value at date of death.
Congress has added a new section 1014(f) to the Internal Revenue Code that says the basis in inherited property shall not exceed the value finally determined for federal estate tax purposes or as shown on a statement provided by the executor in the case of property for which a value has not been finally determined for federal estate tax purposes. A value becomes final for federal estate tax purposes under section 1014(f) if: (1) it is shown on an estate tax return and the IRS does not challenge it within the three year statute of limitations, (2) the IRS sets a different value and the executor does not make a timely challenge, generally within ninety days of the notice of deficiency, or (3) it is determined by a court or in a settlement with the IRS.
In a typical estate, the executor collects and values all of the decedent’s property. If the estate exceeds the value for which a federal estate tax return is due to be filed, $5,430,000 for decedents dying in 2015, the executor prepares and files the estate tax return. The executor finally distributes the property and advises the beneficiary (maybe orally, in a letter or by giving them a copy of the estate tax return) of their basis in the property received.
If the estate is large enough that an estate tax return is being filed, the distributions of the property may not occur until the executor gets a closing letter from IRS stating that it has accepted the return as filed. That may be up to three years after the return is filed. The return itself is not due until nine months after the date of death and may not have been filed until up to sixteen months after the date of death with an extension. In smaller estates, the distributions generally should not occur before creditor’s claim period has expired, typically six months after the executor is appointed, and all of the bills have been paid. While distributions, and thus sales of inherited property, may occur earlier than those broad time frames, most sales of inherited property by beneficiaries do not occur until months or years after the decedent’s date of death. Often, an executor will not know who is going to get exactly what assets from an estate when distributing the residue, as opposed to specifically devised property, until months, if not years after the date of death.
However, the new rules have added section 6035 to the Code, requiring the executor of an estate that is required to file a federal estate tax return to furnish a statement to the IRS and the persons acquiring an interest in property, identifying the value of each interest in such property no later than thirty days after the return is filed. For executors who filed an estate tax return on August 1, 2015, this statement is due on August 30, 2015.
Unfortunately, the new law does not give the executor much help in terms of how they are to comply with this obligation. There is no form to use. Can they just give everyone a copy of the estate tax return and say that it fulfills the requirements? If the estate tax return itself is sufficient, why does the new law require the executor to give the IRS a statement thirty days after the return has been filed with IRS? If the estate is all cash, the basis of which does not change, does the executor still have to file a basis statement? The same issue arises for assets like retirement accounts where the basis does not change. In cases where an executor may previously have valued the personal effects as a lump sum category, absent things like antiques having great value, or where no one is specifically to get the dining room table under the Will, for instance, does the executor now have to value each individual piece of personal property down to the minute items?
Practitioners even differ over which estates are required to file this extra statement. If the estate is greater than the threshold filing number, but, because of the manner in which an exception in the new law is written concerning property that does not increase estate tax liability, does an estate that has no estate tax liability due to the marital or charitable deduction have to report? Or report only the property not going to the surviving spouse (or marital deduction trust for the surviving spouse) or the charity since this property does not increase estate tax liability? These are all questions left unanswered by the new law. It does say the IRS may prescribe regulations that might clarify things, but obviously there are no current regulations. Sometimes regulations, if there are any, can take years to become final. For example, the proposed regulations concerning the tax matters partner for an LLC were issued in 1986, but did not become final until 1996, so counting on regulations is often a futile hope.
And what about people who inherit property from an estate valued at less than the threshold amount requiring an estate tax return? Are they somehow less likely to be using a basis greater than the date of death fair market value and reporting, or not reporting, gain from the sale of inherited property on that basis? Might those people also want the executor to furnish them the same kind of statement to make sure that they do not innocently do that?
The only thing clear about this new law is that nothing is clear. If you are the executor of an estate who is going to be filing a federal estate tax return in the near future, you need to consult as soon as possible with your tax advisor to make sure you comply, as best you can, with this new law.