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Step-up in basis of inherited brokerage accounts

Home Estate Planning Step-up in basis of inherited brokerage accounts

  • DMFA DMFA 
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    Status: Physician
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    Joined: 06/24/2016

    Finally got probate court to come through, a year and a half after my mother passed away, on the taxable brokerage account she had inherited from her father only a year earlier.  I know that a step-up in basis occurs on inheritance such as that when it’s transferred to me (prob would use alternate valuation date on Form 706 Schedule B), the basis becomes whatever it is on that day.  So, if I inherit $100K and sell at $120K, I owe CG tax on $20K.  Cool, simple enough, got it.

    However, without asking me (they may have talked to the executor, though), they sold the positions in the account before transferring assets to me and my siblings.  There were about half winners and half losers, the winners gaining about $29K and losers losing about $9K, for total net gain of $20K.

    So if I figure this correctly, since they were held by the estate when they were sold, my assumptions are:

    • The estate is on the hook for the capital gains tax (fortunately all long-term)
    • The taxes on that will either come out of our inheritance or cost the estate (my dad) about $3K on his 2018 taxes
    • Had they simply sold the losers and transferred, the estate (or my dad) could have claimed the $9K loss over the next 3 year, and we’d pay no LTCGs (well, maybe minimal)?

    I guess I need to know if I should send an email telling them they just cost us several thousand dollars in taxes and lost deductions, or if I should just let it go, or if I’m just plain wrong about how I interpreted this.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #130559 Reply
    Avatar Steven Podnos MD CFP 
    Participant
    Status: Physician, Financial Advisor
    Posts: 140
    Joined: 09/21/2017

    You need to supply a little more information about how the account was originally titled.  If your mother inherited her father’s account as an individual after tax account, it received a step up at your grandfather’s death.  But if the account was just kept separate but owned by your mother, you get another step up to current market value at her death.

     

    If the father’s account is an irrevocable trust for benefit of your mother, then there is only the first step up.  If the instructions were to disburse the holdings to you and your siblings, the ultimate basis/tax treatment is the same.  It just matters when the assets were sold.

    #130756 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7748
    Joined: 01/09/2016

    So this estate is large enough to require a 706? Or your mother is filing 706 to protect her portability exclusion?

    First of all, want to make sure you understand that you cannot use the alternate valuation date unless it reduces the total value of the estate and, therefore, the estate taxes.

    Your basis choices in the assets of the estate are set at death: either the value on the DOD or the value on the alternate valuation date, if applicable and elected. Unless you were planning on holding the stock and never selling it, I don’t understand how the executor cost you more. It’s a $20k gain either way (or whatever it is when you would have sold). What am I missing?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #130787 Reply
    Liked by Craigy
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2126
    Joined: 06/24/2016

    Could they not have harvested the loss on the losers by selling and transferred the winners without taxes gains? Since my dad controls the estate now, could be not have claimed that loss?

    No trust. Just supposed to be disbursed to beneficiaries upon death, but that was 17 months ago. They’re just now getting disbursed because the beneficiary form was filled incorrectly and had to go through probate court…a bit ridiculous.

    All changes are since the last step-up in basis after acquisition.

    So it doesn’t make any difference? If they sell them when they’re still in the account, they don’t have to pay CG tax?

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #130894 Reply
    Avatar Steven Podnos MD CFP 
    Participant
    Status: Physician, Financial Advisor
    Posts: 140
    Joined: 09/21/2017

    Technically the estate has nothing to do with the stocks except to pass them through per the will or trust.  The estate would pay estate tax if the amount of assets was high enough (over 11 million per individual).  Yes, the stocks could have been passed through to you and you could have sold the losers and kept the winners for taxation later when sold.

    #130898 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7748
    Joined: 01/09/2016

    I’m not a fan of TLH, I’m a fan of doing whatever it takes to maximize long-term growth of wealth, so perhaps I’m the wrong person to comment, anyway.

    I just don’t really see an issue. If the estate was valued at > $5.45M (2016), I would hope that some pretty darn smart E&T attorneys were involved and wouldn’t have made a simple mistake. So why do you care that the estate or your dad is paying the inevitable LTCG taxes? It’s not unusual to liquidate to make for easier distribution. It is quite difficult to separate investments into lots to distribute to multiple beneficiaries.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #130904 Reply

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