Question: I am the beneficiary of my aunt’s estate. I received an IRS Form 8971 in the mail. What is the importance of this form?

Answer: When you inherit assets, there should be a tax basis associated with the inherited asset for income tax purposes equal to the ‘fair market value’ of many of the inherited assets at the date of death.

The reason for Form 8971 is to address the perceived challenge for the Internal Revenue Service in potential loss of revenue. The thought is that the IRS may lose billions of dollars in tax revenue if the executor of an estate reports the assets on the estate tax return at one value, and then when the assets are later sold, the beneficiary reports the tax basis at a higher value.

Form 8971 is supposed to address this concern. All estates which file an estate tax return after July 31, 2015 must now file within 30 days after the estate tax return is filed, new IRS Form 8971 and provide a schedule of basis information to each beneficiary.

As a beneficiary you need to know a few things about the schedule:

1. You should give this schedule to your accountant if you have one.
2. This may not tell you exactly the assets you are inheriting. In fact, you may be receiving more than what your schedule reports because certain assets are not included on the Schedule A (e.g., cash, retirement plan accounts and certain tangible personal property are not included).
3. You may not receive all the assets listed on the schedule. The executor may list all the assets because he or she has not yet determined which assets will be distributed to which beneficiary and in what proportions.
4. The schedule tells you your tax basis. When you later sell or dispose of an inherited asset listed on your Schedule A, that number in Column E of the form is the basis you must start with.

Note: By receiving this Schedule, when you transfer an inherited asset that was reported to you other than by selling it (for example, you transfer it by gift to a family member) within 30 days after the transfer, you are supposed to provide the IRS and the transferee with this schedule.

To no surprise, the filing of new form 8971 has and will likely continue to cause a fair amount of confusion for taxpayers.

As always, if you have any questions or would like to learn more, please let me know.

ABOUT STEVE SHANE

Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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