Article on Basis Consistency Reporting for Unmatured Life Insurance Contracts

Vince D’ Addona, Michael Geeraerts & Jim Magner recently published an Article entitled, Basis Consistency Reporting for Unmatured Life Insurance Contracts: Does Basis Step-Up and How Do Executors and Beneficiaries Deal with Reporting?, Steve Leimberg’s Income Tax Planning Newsletter (2016). Provided below is a summary of the Article:

Section 1014(a)(1) states that “the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent [is] the fair market value of the property at the date of the decedent’s death.”  The “step-up” in basis at death is something all estate planners know and use.  With the current $5.45M federal estate tax exemption, many planners intentionally structure assets to be included in a decedent’s estate so the beneficiaries will receive a step-up in basis.  While many advisors are of the opinion that the basis step-up rules apply to an unmatured life insurance policy, there is no case or ruling to cite that clearly supports this.

Now that we have basis consistency rules and Form 8971 to worry about, this is now a real issue for executors and beneficiaries.  Section 1014(f) states that the basis of certain property acquired from a decedent may not exceed its “final value [as] determined for purposes of” the federal estate tax, or if not finally determined, the value of that property as reported on a statement made under new Section 6035.  A policy’s value reported on Form 8971 that is required to be filed would appear to lock the beneficiary into that amount as his/her stepped-up basis, assuming that basis step-up applies to unmatured life insurance policies.