March Madness: IRS issues new reporting rules for trust and estate beneficiaries

Paul V. McCord
Fraser Trebilcock

It’s March and I just finished completing my NCAA basketball tournament brackets. I also just completed an Estate Tax Return. While discussing my bracket selections with a colleague (who seemed nonplussed by my pick of Kansas), she asked if I remembered to complete the new statement required to be filed with the IRS and sent to each beneficiary. I started to sweat. I did not think it was due. No worries, under recently issued temporary and proposed regulations, both you and I now have until March 31, 2016, in order to complete and file this new statement. So instead of complying now, or within the 30-days after filing of an estate tax return, the due date has now been extended to about the time that the elite-eight are selected. Of course, this doesn’t mean we don’t have to worry about preparing them as they are still required – just delayed a few weeks. Then again, nothing is more satisfying in the law than adjournment of a deadline so, with this timeout, let’s discuss some of the requirements of these new statements and recently issued regulations.

The IRS has long thought that the reporting of cost basis on inherited property and the amounts that the beneficiaries reported at the time of sale of the property were not consistent with what is reported on the decedent’s estate tax return. So, how does the IRS get people to match this correctly, and report it correctly?

Last year the President signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which added Section 1014(f) to the IRC. This provision provides that the income tax basis of property received from a decedent under Section 1014(a) cannot exceed the value of the property as determined for estate tax purposes or the value on a statement sent to the beneficiaries under Section 6035. Section 6035 requires personal representatives (or beneficiaries in certain situations) of estates for which an estate tax return is required to be filed to supply the IRS and each person acquiring any interest in property included on the decedent’s estate tax return an information statement.

The IRS is authorized to issue regulations to carry out these new reporting requirements. Originally, these new requirements applied to estate tax returns due on or after July 31, 2015. However, in order to give the IRS time to issue additional guidance and forms to assist taxpayers, the IRS issued Notice 2015-57 last August that extended the due date to February 29, 2016. The IRS again delayed the due date until Mar. 31, 2016 in Notice 2016-19. Finally, on March 4, 2016, the IRS issued temporary regulations providing necessary guidance.

Filing a statement seems simple enough and the IRS released Form 8971 and Instructions to Form 8971 on January 29, 2016 for this purpose. This form includes a Schedule A that will be sent to each beneficiary receiving property included on the estate tax return. For amounts passing to trusts, the Instructions suggest that the report should be given just to the trustee and not each potential trust beneficiary. For example, the Instructions state “In cases where a trust beneficiary or another estate beneficiary has multiple trustees or executors, providing Schedule A to one trustee or executor is sufficient to meet the requirement,” and that the Schedule A will be delivered “to the trustee(s) of a beneficiary trust.” Obviously, this information should be retained by either the beneficiary or the trust in a permanent file for ease of access.

The proposed regulations offer guidance of certain items or instances not subject to reporting. For example, where an estate tax return is filed solely to claim a portability election or a generation-skipping transfer tax election or allocation, no information statement is required because returns reporting these items are not required under Section 6018. Other exclusions include cash (other than coins or paper bills with numismatic value); income in respect of a decedent; personal property that need not be appraised such as household and personal effects having a value of less than $3,000; and property that the estate sells or disposes of in a taxable transaction and does not distribute.

The failure to file an information or correct payee statements invites a penalty of $250 per return or statement although this penalty may be waived where “reasonable cause” exists. Other penalties may apply to the individual who receives the property. Specifically, if one were to sell property and claim a basis higher than that reported on the estate tax return, that individual may face a penalty related to the inconsistent reporting of 20%.

While I was happy to learn of the March 31st deadline - it is fast approaching. We are best served by paying close attention to these new reporting rules to avoid costly penalties. Reviewing these new rules and creating best practices should ensure that the new rules cause the least confusion for clients and beneficiaries.


Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or