Basis step-ups: estate property: estate and income tax considerations.

• Author: Fukuto, Erin S.
• Position: Estate planning

The death of a client is fortunately not a common occurrence, which means many tax practitioners may not be familiar with the issues and planning opportunities that arise during the preparation of the post-mortem tax compliance and reporting.

For estate tax purposes, the tax practitioner will be working to minimize the tax by reducing the value and subsequent tax basis of assets as much as possible through the use of discounts and other adjustments. On the other hand, in planning for future income taxation upon ultimate disposition of the assets, the tax practitioner will generally try to keep the tax basis high to mitigate any taxable gain from future appreciation.

These dual concerns can complicate the role CPAs will play in assisting the decedent's estate and its beneficiaries through the complexities of the post-mortem period. In addition, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Act) made additions to reporting-requirements to curtail perceived abuses in the reporting of tax basis of assets in an estate. These new reporting requirements will be discussed in detail below.

What Happens to Tax Basis Upon Death?

Upon death, the decedent's estate is required to report as tax basis for estate tax purposes the fair market values of all applicable assets-either the values at date-of-death, or at the alternate valuation date, if elected.

If the value of the individual assets includible in the estate exceeds their respective tax bases (generally their original costs plus improvements and other adjustments), then the assets will receive a step-up in their tax bases to the value on the valuation date. Alternatively, if the values of assets are less than their tax bases, such assets will receive a step-down to the lower amount.

Before the Act, there was no requirement for the estate to notify beneficiaries of the asset values reported on the estate tax return.

Other Tax Issues Arising with Ownership Interests in Partnerships

The death of a partner in a general, an LP or LLC can have additional tax basis complications that are often overlooked by tax practitioners. A step-up in basis of a partnership or LLC interest upon the death of a partner/LLC member will only apply to the "outside" basis, i.e., the tax basis of the interest in the hands of the successor owners.

This change to the outside basis will create a discrepancy between such outside basis and the successor owners' share of the partnership's...