Form 8971 Filing Unhappiness

The IRS has now issued a final Form 8971 and instructions. If you recall, this Form is newly required by executors of estates filing a Form 706 (federal estate tax return). The Form requires a schedule for each beneficiary which lists the assets received by the beneficiary and the estate tax value of those assets. The purpose is to put documentation in the hands of the beneficiary to allow it to calculate basis in the received assets. This will allow the beneficiary to calculate gain or loss on a subsequent sale of the assets received.

The form must be completed within 30 days of the filing of the Form 706. Unfortunately, many estates and related trusts will not have wound down their administration by that point and may not have identified (or be capable of identifying) assets that will be given to each beneficiary. So how should the Form 8971 be filed if the assets going to each beneficiary cannot be identified by the due date?

The instructions give us the unhappy direction to report all potential assets that could go to the beneficiary in this circumstance. More particularly, the instructions provide:

All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary's Schedule A. If the executor has not determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary's distribution on that beneficiary's Schedule A.

Then, when more precise information is known about the allocation of assets, an updated Form 8971 is then filed.

Sounds like fun times for practitioners!

Besides the difficulties in preparing such schedules, can you imagine the questions and concerns that beneficiaries will have upon receiving such a large and misleading schedule? Surely, some of them will think that they are going to receive all the assets listed on the schedule.

Since this is a known problem with the new statute that requires the disclosure form, and the IRS does not provide any real relief in its instructions, perhaps Congress might take up an amendment to the law that the due date for the Form 8971 is deferred until either actual distribution is made to the beneficiary or the assets to be distributed to the beneficiary can be precisely identified.

Form 8971; Form 8971 Instructions