Up until recently, to the frustration of the IRS, the cost basis for mineral interests and other assets for estate tax purposes did not have to be the same as the basis used for income tax purposes. In other words, the executor of an estate could use a lower value for the estate’s mineral interests in order to minimize the estate tax on those assets. Later, if a beneficiary of the estate sold those assets, the beneficiary could use a higher basis in order to minimize capital gain taxes. The value used by the executor created a presumption of the basis for income tax purposes, but the beneficiary selling that asset had the option to use a higher basis, so long as they could good provide the IRS with “clear and convincing evidence” that the value was actually higher.
Recently, the U.S. Congress enacted the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which was signed into law July 31, 2015 and was effective immediately. One portion of this new law limits the beneficiary’s basis to the value used for estate tax purposes. In addition, executors of estates are now required to file information statements with the IRS regarding the basis used and also must provide beneficiaries information about the basis of assets they receive. This new reporting requirement applies to all estate tax returns filed after July 31, 2015 that were required to be filed but it does not apply to optional estate tax returns.
When the assets of the estate include mineral interests or royalty interests, it is important to obtain an accurate opinion of their value. If you are the executor of an estate and need valuation of the estate’s Texas mineral interests, please give our office a call. We will be glad to talk to you about preparing a valuation for you.