Federal Estate Tax Changes: New Estate Reporting Requirements, and Beneficiaries Must Use Estate Tax Value as Basis

There are significant new procedural changes that were implemented into law this summer as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.  Among the changes:

  • If an Estate is required to file an Estate Tax Return (IRS Form 706), the Estate must – – separately and in addition to the Estate Tax Return – – report to the IRS and to each estate beneficiary, the estate tax value of property to be received by the beneficiary.
  • In addition, for inherited property, estate beneficiaries must use the same value as reported on the Estate Tax Return as the basis in the property.  If not, beneficiaries face a 20% accuracy penalty.  This new provision seeks to fix a tax loophole whereby estates reported values using a valuation discount (e.g., for lack of marketability of family businesses), and then beneficiaries later sell the same assets reporting a higher book value as basis.

These changes follow other changes passed by Congress in recent years, such as “portability” of any unused exemption from the estate tax (currently $5,430,000 per person).  The tax law now allows for the portability or transfer of any unused estate tax exemption left behind at the death of the first spouse, so that the surviving spouse may add the unused amount to his/her own exemption.  However, certain formalities and paper work must be followed.  Portability is not automatic.

You should be aware of these new changes if you are an executor of an estate, if you have inherited property, or a deceased spouse has left behind an unused portion of his or her exemption from estate tax.  In general, we recommend re-examining estate planning and tax planning every few years, and certainly at each major life event (birth, death, divorce, selling valuable assets, inheritance, etc.).  Contact us for additional information.

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