The Appraisal the Executor Reports on Form 8971 Is the Cost Basis Every Heir Is Stuck With. A Low Number to Shave Estate Tax Costs the Kids Capital Gains Later, and the IRS Enforces the Match
An executor files a lower appraisal to trim the estate tax bill, and her family cheers. Then her brother sells the inherited shares and discovers the IRS already knows the number he can use. Who really pays for the discount?
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A widower dies in 2026 with an estate of $16,000,000. His largest asset is a block of shares in the family distribution company, and his will leaves those shares to his son. Everything else, the residue, goes in equal thirds to the son and his two sisters. The will’s tax clause pays the estate tax out of that residue.
The executor is his oldest daughter. She gets two appraisals. The first values the shares at $4,000,000. The second leans hard on discounts for lack of control and marketability and yields $3,200,000. She files Form 706 at the lower number, and the estate tax bill shrinks.
Fourteen months later the son sells the shares to a competitor for $4,500,000. His CPA pulls the Schedule A his sister sent him with Form 8971 and says him his cost basis is $3,200,000. The first appraisal is irrelevant now.
Form 8971 Locks Every Heir to the Estate’s Number
Inherited property normally takes a basis equal to the price it would fetch on the open market at death under 26 U.S.C. § 1014(a)(1). Section 1014(f)(1) caps that basis: it “shall not exceed” the final estate tax value or the value the executor reports to the heir. The cap applies to property whose inclusion increased the estate tax, which means the son’s shares.
Section 6035(a)(1) requires the executor to report each asset’s value to the IRS and to every beneficiary. That report is Form 8971 and its Schedule A, required for estates filing Form 706 after July 15, 2015. It is due by the earlier of 30 days after the 706 due date (including extensions) or 30 days after the 706 is filed. IRS Publication 551 says certain beneficiaries are required to use this value as the initial basis.
The IRS enforces the match. If an heir claims a higher basis and underpays, the excess is an “inconsistent estate basis” and carries a penalty of 20% of the underpayment.
Lowball Math on a Family Business Stake
Assumptions: death in 2026, a basic exclusion of $15,000,000, no prior taxable gifts and no deductions. Every dollar above the exclusion is taxed at the top estate rate of 40%. A gain this size places the son in the 20% capital gains bracket, and the 3.8% net investment income tax brings his rate to 23.8%.
| Item | Full value | Lowball |
|---|---|---|
| Shares on Form 706 | $4,000,000 | $3,200,000 |
| Taxable estate | $16,000,000 | $15,200,000 |
| Estate tax | $400,000 | $80,000 |
| Son’s gain on the sale | $500,000 | $1,300,000 |
| Son’s capital gains tax | $119,000 | $309,400 |
The $800,000 discount saves the estate $320,000. It costs the son an extra $190,400 in capital gains tax.
Savings and Costs Land on Different Children
The estate tax savings flow into the residue, which is split three ways. The son’s share is about $106,667. He alone pays the extra $190,400. That leaves him about $83,733 behind, while each sister picks up about $106,667 and owes nothing more. The lowball moved money from the brother to his sisters.
The savings also hold only if the appraisal survives an audit. When the final value is raised to $4,000,000, the estate pays the $320,000 plus interest, and the executor owes a supplemental Schedule A within 30 days of the adjustment. The son’s basis rises with it.
Discount-heavy appraisals are common in estates like this one. Closely held stock appeared on 2,223 of the 7,195 estate tax returns filed in 2024.
A Full-Value Appraisal Keeps the Siblings Even
Filing at $4,000,000 costs the estate $400,000, and all three children share that bill equally. The son’s later tax is $119,000 on a $500,000 gain. Nobody inherits an audit fight or a lopsided tax bill.
If the family still wants the discount, the fix goes in the will. A tax allocation clause, or an balancing legacy to the child who receives the discounted asset, holds the savings and the capital gains cost with the same person.
Five Moves Before the Form 706 Goes In
- Get every appraisal and its discount assumptions from the executor before the 706 is signed.
- Read the will’s tax clause and compare who pays the estate tax with who receives each discounted asset.
- Put the Form 8971 deadline on the calendar: 30 days after the 706 is filed or due, whichever comes first.
- File your Schedule A with the asset’s records and use that exact value on Form 8949 when you sell.
- Once the estate’s value is adjusted, get the supplemental Schedule A. That number becomes your new basis.
A CPA or estate tax attorney can run these numbers on your family’s actual will and assets.
One Number Follows the Heir to the Sale
Here, $190,400 is the extra capital gains tax created by an $800,000 cut to one appraisal, and the heir who holds the asset pays all of it.
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Vilma Rios is a tax professional, tax researcher, and financial writer with more than 15 years of experience in tax and accounting. Her work spans federal tax research, financial journalism, retirement planning, investment taxation, capital gains, inherited assets, and tax education. She specializes in translating complex tax and financial topics into clear, practical information that helps individuals, families, retirees, and investors make informed decisions.
She has presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as "Your Tax Geek," Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
