What Beneficiaries Need to know for Form 8971

Your Guide to State, Local, Federal, Estate + International Taxation

In the past, beneficiaries who sold inherited assets may have reported different (higher) values of assets than what was originally reported on the estate tax return. To stop this, the IRS issued proposed and temporary regulations that now require a beneficiary’s basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for federal estate tax purposes.

Beneficiaries started receiving copies of their Schedule A by/after June 30, 2016. The Schedule A reports the value of property as reported on the estate tax return that the beneficiary has received or may receive, in whole or in part, from the estate of the decedent. The IRS also receives copies of each beneficiary’s Schedule A so they can now “match” the value on future tax returns.

If the executor has not made distributions, the Schedule A will list all of the property that could potentially be used to satisfy the beneficiary’s interest. Thus, the Schedule As of multiple beneficiaries may be duplicative. When the beneficiary receives his Schedule A, he may think he is getting a windfall, and may be very disappointed when his distribution is ultimately significantly less than the assets reported on his Schedule A.

The asset’s value reported on Schedule A becomes the beneficiary’s initial basis for calculating depreciation or amortization, or for determining gain or loss on the sale, exchange or disposition of the property.

Since the IRS has three years after the estate tax return is filed to audit and adjust the value, if the final value has not been determined when the beneficiary’s basis in the property becomes relevant for federal tax purposes, (for example, to report a sale on Schedule D) the beneficiary will use the value reported on his Schedule A. He is now prohibited from claiming a basis in excess of the value reported on Schedule A. If the final value changes and is different from the initial basis reported on the tax return, the beneficiary will be required to file an amended return. Failure to amend may result in a deficiency and underpayment penalties.

Supplemental Reporting Required for Future Gifts or Transfers of Inherited Property to Related Transferees

If a beneficiary later gifts or transfers all or a portion of any property reported on a Schedule A to a related person (as defined in § 267 of the tax code), he must give a new Schedule A to that transferee and file it with the IRS within 30 days of the transfer. A new Schedule A is required to be filed for all subsequent lifetime transfers to related transferees.

The beneficiary should retain his initial and/or supplemental Schedule(s) A indefinitely as the information will be needed for any later sales, gifts or transfers of all or any portion of the inherited property received from the estate. He should also provide his tax (and financial) advisor(s) with a copy of Schedule A so the advisor(s) can assist with the federal tax compliance.

By Jennie Ward