Unless this is the first time you are visiting my site, you know that the United States estate tax exemption for non-residents (foreign persons) is a paltry $60,000 (compared to the $5,450,000 for U.S. persons). That means if you die owning or you represent an estate that owns property situated in the United States (i.e., real property or shares in U.S. corporations) worth in excess of $60,000, you MUST file a U.S. estate tax return, IRS Form 706-NA. Whether you must ultimately pay estate tax is a different question, depending on other variables including but not limited to the tax treaty with your country of residence, your worldwide estate and the intended heirs.
What you may not have known is that when you inherit property situated in the United States you receive as step up in basis. This is a good thing. Under U.S. tax law, a beneficiary of U.S. property from a decedent, receives the property at the fair market value as of the date of death of the testator. For example, if your mother purchased property in Florida for $150,000 in 1991 and it is valued at $400,000 on the date of her death in 2016, you receive the property with a basis of $400,000. So, if you sell the property shortly after her death for $400,000, the $250,000 of appreciation has just escaped U.S. income tax altogether. These laws affect not only the basis of assets acquired by U.S. heirs but will affect the basis of U.S. property held by foreign decedents and passed on to their foreign heirs.
In July 2015, new laws were enacted and made part of the U.S. Internal Revenue Code to ensure there is conformity and consistency in the basis of assets inherited by heirs of an estate with the value of those assets as reported for U.S. estate tax purposes. The new law imposes additional reporting requirements on the executor/personal representative of a decedent’s estate to account for these basis adjustments.
Under new Section 1014(f)(1) of the Internal Revenue Code, basis adjustment on property acquired from a decedent cannot exceed the final value of the property as determined for federal estate tax purposes. Essentially what this means is that the value of an asset as listed on the estate tax return and on which the estate tax is calculated must be the basis of the asset used by the heir who inherits that asset.
Furthermore, under new Section 6035 of the Internal Revenue Code, an executor of an estate who is required to file an estate tax return must provide a certain statement to the Internal Revenue Service (IRS) and to each beneficiary of the estate. The statement must list the value of each interest in property received by the beneficiary as reported on the estate tax return.
Section 6035(a)(3) provides that the statement must be provided to the estate beneficiary no later than the earlier of (i) 30 days after the due date of the estate tax return, or (ii) 30 days after the date the estate tax return is filed.
There are some serious reasons to comply with this new filing requirement. For instance, Code Section 6724(d)(1)(D) implies a failure to file penalty will be assessed on an executor who neglects to file the required statement, and new Section 6662(b)(8) imposes a 20% accuracy-related penalty on a beneficiary who later overstates the basis of property received from the decedent.
The statement described in Section 6035 has been formalized as IRS Form 8971. Click the link for IRS Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.
Up Next: U.S. Persons Receiving Property from a Foreign Estate: What the IRS Wants to Know!
About Ingenuity Counsel
Ingenuity Counsel, based in Windsor, Ontario, Canada, provides cross border tax & United States legal services to Canadians. Michael Kennedy and his team at Ingenuity Counsel Incorporated assist companies and entrepreneurs with immigration, business, real estate and tax matters in the U.S. With his expertise, he is able to walk clients through the process of successfully setting up their business in the United States. Additionally, Ingenuity Counsel advises clients that own property in Florida, Michigan, Arizona & California with respect to income tax, estate planning & administration matters. Michael also handles wills & trusts, powers of attorney and probate administrations. Whether you have real property, financial accounts or business assets located in the United States, Michael and his team can help.
Michael is admitted to practice law in California & Michigan and permitted by the Law Society of Upper Canada to provide U.S. legal services in Ontario as a Foreign Legal Consultant. Prior to establishing Ingenuity Counsel in 2012, he practiced law in the United States for more than 10 years in California, Michigan and Florida.
To learn more about Michael and his team at Ingenuity Counsel and how they can help you and your family, visit www.ingenuitycounsel.com.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The information contained herein is for informational purposes only, and cannot be relied upon as legal advice. Every person’s needs and situation are different that must be analyzed independently. After reading this article, if you feel you have, or a client has, U.S. estate or gift tax exposure or any other U.S. tax or legal issue, you should promptly consult with an experienced U.S. lawyer in order to examine the situation. Your reliance upon any information contained in this article will not create an attorney-client relationship with the author.
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