by Margot S. Edwards
Executors of estates required to file a Form 706 Estate Tax Return, and filing such return after July 31, 2015, must comply with two new reporting requirements. These requirements are set forth in Section 6035 of the Internal Revenue Code (the “Code”), and corresponding proposed regulations. The new reporting obligations are designed to ensure that the initial basis in property distributed to an estate beneficiary is equal to the value of such property for estate tax purposes, and to provide for ongoing consistency of basis. These obligations include both (1) filing form 8971 with the IRS, and (2) providing a statement to certain beneficiaries with information about the value of estate assets received by those beneficiaries.
Who Must File
The term “executor” as used in Section 6035 incorporates the estate tax definition set forth in Section 2203 of the Code. As a result, for purposes of identifying who must complete these filings, the term includes, for example, the trustee of a fully funded revocable trust.
The proposed regulations clarify that an executor filing a form 706 that is not required, but which is filed to elect portability or to make GST elections, is not required to fulfill these reporting obligations.
What Must be Filed
Executors of relevant estates must file a form 8971 with the IRS. Form 8971 provides the IRS with information related to each beneficiary of an estate who may receive assets in kind from the estate.
Form 8971 also includes a separate Schedule A, which must be completed to list any specific assets that may be distributed in kind from the estate, and the estate tax value of each such asset. An executor should complete a separate Schedule A for every beneficiary who may receive property in kind from the estate, so that each Schedule A only lists assets received or to be received by one beneficiary. The executor should then provide each beneficiary with a copy of his or her specific Schedule A, which satisfies the requirement of providing the beneficiary with a statement under Section 6035. If a trust is a beneficiary of the estate and may receive assets in kind, the appropriate Schedule A must be provided to the trustee.
All property that was required to be reported on the form 706 must be reported on form 8971, except:
- Income in respect of the decedent;
- Tangible personal property for which no appraisal was required;
- Property sold or exchanged by the estate in a transaction in which a gain or loss was recognized.
If adjustments are made after the form 8971 is filed (and the Schedule(s) A provided to the appropriate beneficiaries), the executor must complete supplementary filings. For example, if the value of an asset is adjusted during audit, additional assets are discovered, or the identity of a beneficiary changes (due to death, disclaimer, etc.), then the executor must file a supplemental form 8971, and provide updated Schedules A to the affected beneficiaries.
Form 8971 must be filed by the earlier of (a) 30 days after the due date of the form 706 (including extensions), and (b) 30 days after the form 706 is actually filed. Due to delays in publishing the form and the proposed regulations, the first forms must be filed, and Schedules A provided, by June 30, 2016. This date has been extended twice already, and could be extended again.
One of the most interesting provisions of the proposed regulations is the reporting requirement related to later transfers. Additional reporting is required if a beneficiary receives an asset in kind from an estate, that estate was required to file form 8971, and the beneficiary later transfers the property to a “related transferee.” In this case, such beneficiary/transferor must file a supplemental form 8971 and provide the appropriate schedule A to the new recipient of the property. This requirement applies if the “related transferee” receives the property in a transaction where its basis is determined with reference to the original beneficiary’s basis. For example, if a beneficiary receives property from an estate, and then gifts that property to a related transferee, the beneficiary must comply with the additional reporting requirements.
The term “related transferee” includes a member of the transferor’s family as defined in Section 2704(c)(2), a controlled entity within the meaning of Section 2701(b)(2)(A) or (B), or a trust of which the transferor is a deemed owner for income tax purposes. This is remarkable because it seems to exclude irrevocable, non-grantor trusts. This may be an area of clarification in the final regulations.
There is no time limit on this reporting requirement. The beneficiary could transfer the property many years later and still be required to comply. This seems ripe with potential for error due to poor record-keeping.
Penalties may be imposed under Section 6721 for the failure to timely file form 8971, and under Section 6722 for the failure to timely provide statements to beneficiaries. The penalties depend on when the form is filed, and whether the failure to file is intentional. Details regarding the penalty amounts are set forth in the instructions for form 8971.