Can they be transferred to others in that kind of scenario?
According to the proposed regulations released in April, if a taxpayer who holds an interest in a Qualified Opportunity Fund dies, the tax benefits of such interest carry over if the interest is distributed to a beneficiary of the estate. This includes a carryover of the five-, seven- and 10-year holding periods.
This is in the second tranche of guidance. In summary, OF holdings can be willed to an heir.
Good news. All stays the same and the burdens and benefits are carried over to the beneficiaries.
Yes, the benefits transfer to the new owners upon death, but note as well that the obligation to pay the deferred capital gain also transfers to the estate (and, presumably, its beneficiaries).
The latest proposed regulations do allow for succession planning to maintain the tax benefits if the original taxpayer dies.
The beneficiaries step into the shoes of the decedent. This means that nothing changes except for the taxpayer. Thus, the beneficiary will need to be aware that the tax on the original gain would become due on Dec. 31, 2026, and reportable on their tax return no different than if the original taxpayer were still alive.
The heir(s) will step into the shoes of the decedent and will achieve step-ups in years five, seven and 10 from the original investment date and recognize gain in 2026 if the decedent dies before that date. Unlike most inherited assets, there is no tax step-up to fair market value on the decedent's date of death. An heir can decline their inheritance and it would flow to others under the trust or will without tax consequences, but acceptance and a subsequent transfer will trigger proportionate gain to the transferor.
Interests in a QOF can be transferred by bequest (transfer during life results in an "inclusion event"). Heirs generally should obtain the no-tax-on-appreciation benefit after 10 years, based on decedent's holding period. I believe the recognition of 85% of the gain in 2026 is income in respect of a decedent, so that the estate would have to file the income tax return. However, there is more research needed for this.
In general, the termination of the ownership if the interest on a QOF will be an inclusion event. Nevertheless, the proposed regulations exempt from this general rule, transfer to an estate or the estate's beneficiaries by reason of death of the owner.
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