When a beneficiary inherits property from a decedent, the asset receives a step-up in basis to its value on the date of death – which is both a tax perk for inheritors, and a form of tax simplification (as beneficiaries otherwise may not know what the decedent’s original cost basis was anyway).
However, with hard-to-value assets, there may be a disagreement between the valuation for estate tax purposes, and the value used by the beneficiary for cost basis reporting. After all, the estate prefers a small value (to minimize estate taxes) while the beneficiary ideally wants the highest possible value reported (to get a higher basis step up). And in the past, it was even possible for the executor and beneficiary to report different amounts, each to their own benefit (and the detriment of the IRS!).
To close this perceived “loophole”, in 2015 Congress created the new IRC Section 1014(f) that requires beneficiaries to use a date-of-death valuation for cost basis purposes that is no larger than the amount reported on the estate tax return, curbing the abuse. In addition, Congress also established the new IRC Section 6035, which requires executors to file a new Form 8971 to notify the IRS who the beneficiaries are, along with a Schedule A that informs both the IRS and the beneficiaries what their inherited cost basis will be.
Read the full article at kitces.com.