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All Estate Tax Returns Filed Since July 31, 2015 Affected by “Inheritors’ Tax Loophole”

Posted on: January 18th, 2016
inherited property valueOver the summer, Congress passed new legislation that addresses the Internal Revenue Service’s (IRS) regulation requests regarding statements of inherited property values on estate tax returns. This legislation will potentially affect estate tax returns filed on or after July 31, 2015.

The new requirements address an “inheritors’ tax loophole” by restricting the ability of beneficiaries to claim a basis higher than the date-of-death value for assets inherited from decedents’ estates. In early 2015, TrustCounsel’s tax attorneys released a warning about a similar issue concerning the possible elimination of the step-up in tax basis. In the past, beneficiaries could disagree with inherited asset values and propose alternate (usually higher) values to lessen the capital gains tax (presently 23.8 percent) requirements that would be imposed when the assets are sold. Along with disallowing an alternate valuation, the new provisions include:
  1. New responsibilities for executors. Executors of estate required to file an estate tax return must report asset values to the IRS and beneficiaries. Beneficiaries cannot amend the values an executor reports. Executors will be fined $250.00 if they neglect to report values. New guidelines for appraisals are forthcoming for executors.
  2. Beneficiaries penalized. A 20 percent penalty will be imposed on beneficiaries who overstate asset value on their income tax returns. (The penalty is 20 percent of the underpaid tax amount.) A six-year statute of limitations is in place for overstatements.
The IRS suspects the “loophole” prevented significant tax collection in the past. More than $1 billion in additional tax revenue over the next decade is anticipated as a result of the new administration requirements, as recently reported by Forbes.

These new requirements will potentially affect the obligations of executors and beneficiaries overseeing estate matters.  As a result, the legislation might make irrevocable trusts more attractive as a method of reducing the value of one’s estate. For estate planning purposes, individuals should discuss trust options during their next plan review. Irrevocable trust assets generally pass privately to beneficiaries and are not included in one’s taxable estate, thus bypassing the paperwork and valuation challenges above.

The deadline for new form submissions is February 29, 2016. However, official forms are not available as of this writing. A draft of Form 8971 was released in mid-December by the IRS. Our tax attorneys will share details about the new forms on Twitter @estateplansnc and Facebook when they are released. Subscribe to our blog to receive tax and estate planning updates.

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