February 25, 2016
Authored by: Stephanie Moll
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 179 of the Green Book and is re-printed here for your convenience:
EXPAND REQUIREMENT OF CONSISTENCY IN VALUE FOR TRANSFER AND INCOME TAX PURPOSES
Section 1014 provides that the basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s date of death. Similarly, property included in the decedent’s gross estate for estate tax purposes generally must be valued at its fair market value on the date of death. Although the same valuation standard applies to both provisions, until the enactment on July 31, 2015, of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act), there was no requirement that the recipient’s basis in that property be the same as the value reported for estate tax purposes. This Act amended section 1014 to provide generally that the recipient’s initial basis in property as determined under section 1014 cannot exceed the final value of that property for estate tax purposes. This consistency requirement applies to property whose inclusion in the decedent’s gross estate increases the estate’s liability for federal estate tax.
Reasons for Change
Because the consistency requirement enacted in 2015 applies only to the particular items of property that generate a federal estate tax, the requirement does not apply to property transferred by gift, or to property that qualifies for the estate tax marital or charitable deduction, or to any property of an estate with a total value that does not exceed the applicable exclusion amount ($5,450,000 for 2016). Although the exclusion of property given on death to charities (taxexempt organizations) has only a minimal impact for income tax purposes, there is a possible effect on the annual excise tax imposed on certain such organizations. However, the exclusion from the application of the consistency requirement of property qualifying for the estate tax marital deduction is significant because an unlimited amount of property may qualify for the estate tax marital deduction in a decedent’s estate tax proceeding. Although it is true that the value of such property passing to the decedent’s surviving spouse may be increased without incurring any federal estate tax, and a high estate tax value provides a high cap on the recipient’s permissible basis, current law contains provisions to prevent an inaccurately high estate tax valuation. Specifically, the executor certifies to the accuracy of the information on the estate tax return under penalties of perjury, and significant underpayment penalties are imposed on the understatement of capital gains and thus income tax that would result from an overstatement of basis.
The proposal would expand the property subject to the consistency requirement imposed under section 1014(f) to also include (1) property qualifying for the estate tax marital deduction, provided a return is required to be filed under section 6018, even though that property does not increase the estate’s federal estate tax liability, and (2) property transferred by gift, provided that the gift is required to be reported on a federal gift tax return.
The proposal would be effective for transfers after the year of enactment.
Last year’s Green Book Proposal on the same topic can be read here.