Cost basis of stock sold in an estate account?

Discussion in 'Tax' started by Geo C, Sep 11, 2006.

  1. Geo C

    Geo C Guest

    My mother held around $200k in stocks and mutual funds in a
    PNC Investment account. Some of the stocks were bought
    decades ago. After her death in March, as the executor, I
    set up an estate account with PNC and transferred in all of
    the assets.

    I would like to have PNC sell all the stocks and mutual
    funds in the account and distribute the cash proceeds to
    each of her heirs (my self included).

    The broker tells me that the cost basis for the sale of the
    stocks/funds would be the price which my mother originally
    paid for the security. I think that the cost basis is the
    FMV at the date of death.

    Before I order the sale and to avoid large capital gains, I
    need to make sure that I am correct. The estate is too
    small to file Form 706.

    The question is, what is the cost basis for the securities
    which are sold while still in the estate account?

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    Geo C, Sep 11, 2006
    #1
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  2. Geo C

    Dick Adams Guest

    Geo C wrote:

    > My mother held around $200k in stocks and mutual funds in a
    > PNC Investment account. Some of the stocks were bought
    > decades ago. After her death in March, as the executor, I
    > set up an estate account with PNC and transferred in all of
    > the assets.
    >
    > I would like to have PNC sell all the stocks and mutual
    > funds in the account and distribute the cash proceeds to
    > each of her heirs (my self included).
    >
    > The broker tells me that the cost basis for the sale of the
    > stocks/funds would be the price which my mother originally
    > paid for the security. I think that the cost basis is the
    > FMV at the date of death.
    >
    > Before I order the sale and to avoid large capital gains, I
    > need to make sure that I am correct. The estate is too
    > small to file Form 706.
    >
    > The question is, what is the cost basis for the securities
    > which are sold while still in the estate account?


    The broker has it half right. Your mother's cost basis was
    the price originally paid. The estate's cost basis is the
    FMV at the date of your mother's death.

    Dick

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    Dick Adams, Sep 12, 2006
    #2
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  3. Geo C

    Herb Smith Guest

    Geo C wrote:

    > My mother held around $200k in stocks and mutual funds in a
    > PNC Investment account. Some of the stocks were bought
    > decades ago. After her death in March, as the executor, I
    > set up an estate account with PNC and transferred in all of
    > the assets.
    >
    > I would like to have PNC sell all the stocks and mutual
    > funds in the account and distribute the cash proceeds to
    > each of her heirs (my self included).
    >
    > The broker tells me that the cost basis for the sale of the
    > stocks/funds would be the price which my mother originally
    > paid for the security. I think that the cost basis is the
    > FMV at the date of death.


    YOU are correct, your broker is not. All of the decedent's
    assets receive a "stepup" (or stepdown) at death; the
    original purchase price is no longer valid or relevant.

    Besides, why worry what the broker thinks? - he doesn't file
    your tax return - his responsibity is to sell the
    stocks/bonds and provide you with documentation of the
    sale(s).

    > Before I order the sale and to avoid large capital gains, I
    > need to make sure that I am correct. The estate is too
    > small to file Form 706.
    >
    > The question is, what is the cost basis for the securities
    > which are sold while still in the estate account?


    FMV on date of death. Whether sold while in the estate
    account or distributed to the beneficiaries and sold. All
    sales are long term by definition.

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    Herb Smith, Sep 12, 2006
    #3
  4. Geo C <> wrote:

    > My mother held around $200k in stocks and mutual funds in a
    > PNC Investment account. Some of the stocks were bought
    > decades ago. After her death in March, as the executor, I
    > set up an estate account with PNC and transferred in all of
    > the assets.
    >
    > I would like to have PNC sell all the stocks and mutual
    > funds in the account and distribute the cash proceeds to
    > each of her heirs (my self included).
    >
    > The broker tells me that the cost basis for the sale of the
    > stocks/funds would be the price which my mother originally
    > paid for the security. I think that the cost basis is the
    > FMV at the date of death.


    You're right, your broker's wrong.

    > Before I order the sale and to avoid large capital gains, I
    > need to make sure that I am correct. The estate is too
    > small to file Form 706.


    But the estate probably has taxable income - and your mother
    may have income in respect of a decedent. You'll do best to
    go to a professional tax preparer who has experience with
    estate returns. That person will have more credibility with
    the stock broker, who shouldn't be giving tax advice anyway.

    Stu

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    Stuart A. Bronstein, Sep 12, 2006
    #4
  5. Geo C

    joetaxpayer Guest

    Geo C wrote:

    > My mother held around $200k in stocks and mutual funds in a
    > PNC Investment account. Some of the stocks were bought
    > decades ago. After her death in March, as the executor, I
    > set up an estate account with PNC and transferred in all of
    > the assets.
    >
    > I would like to have PNC sell all the stocks and mutual
    > funds in the account and distribute the cash proceeds to
    > each of her heirs (my self included).
    >
    > The broker tells me that the cost basis for the sale of the
    > stocks/funds would be the price which my mother originally
    > paid for the security. I think that the cost basis is the
    > FMV at the date of death.
    >
    > Before I order the sale and to avoid large capital gains, I
    > need to make sure that I am correct. The estate is too
    > small to file Form 706.
    >
    > The question is, what is the cost basis for the securities
    > which are sold while still in the estate account?


    I'll refrain from sarcasm toward the broker. (But I'll say
    "???")

    You are quite correct. The only gains are from appreciation
    since your mom passed. The estate tax return needs to
    handle this before distribution to the heirs. If you have
    any doubts on filling out the estate return, consider using
    a pro familiar with the process.

    JOE

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    joetaxpayer, Sep 12, 2006
    #5
  6. Geo C <> writes:

    > My mother held around $200k in stocks and mutual funds in a
    > PNC Investment account. Some of the stocks were bought
    > decades ago. After her death in March, as the executor, I
    > set up an estate account with PNC and transferred in all of
    > the assets.


    [snip]

    > The broker tells me that the cost basis for the sale of the
    > stocks/funds would be the price which my mother originally
    > paid for the security. I think that the cost basis is the
    > FMV at the date of death.


    That's why you don't get tax advice from a broker.

    Assuming the securities were in your mother's name when
    she died, their basis is their FMV on the day she died
    (unless she's subject to estate tax and you choose the
    alternate valuation date).

    --
    Rich Carreiro

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    Rich Carreiro, Sep 13, 2006
    #6
  7. Geo C

    ed Guest

    joetaxpayer wrote:
    > Geo C wrote:


    >> My mother held around $200k in stocks and mutual funds in a
    >> PNC Investment account. Some of the stocks were bought
    >> decades ago. After her death in March, as the executor, I
    >> set up an estate account with PNC and transferred in all of
    >> the assets.
    >>
    >> I would like to have PNC sell all the stocks and mutual
    >> funds in the account and distribute the cash proceeds to
    >> each of her heirs (my self included).
    >>
    >> The broker tells me that the cost basis for the sale of the
    >> stocks/funds would be the price which my mother originally
    >> paid for the security. I think that the cost basis is the
    >> FMV at the date of death.
    >>
    >> Before I order the sale and to avoid large capital gains, I
    >> need to make sure that I am correct. The estate is too
    >> small to file Form 706.
    >>
    >> The question is, what is the cost basis for the securities
    >> which are sold while still in the estate account?


    > I'll refrain from sarcasm toward the broker. (But I'll say
    > "???")
    >
    > You are quite correct. The only gains are from appreciation
    > since your mom passed. The estate tax return needs to
    > handle this before distribution to the heirs. If you have
    > any doubts on filling out the estate return, consider using
    > a pro familiar with the process.


    Your broker would be correct if the account held funds from the Bypass
    portion of a A-B Trust created while your father was alive. In that
    case the stocks would be valued at your father's DOD with no further
    step-up available. The A portion of the trust would get a step-up in
    basis when your mother died. The account should then have been titled
    under the Trust's name, not your mother's personal name,

    ed

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    ed, Sep 13, 2006
    #7
  8. >> My mother held around $200k in stocks and mutual funds in a
    >> PNC Investment account. Some of the stocks were bought
    >> decades ago. After her death in March, as the executor, I
    >> set up an estate account with PNC and transferred in all of
    >> the assets.
    >>
    >> I would like to have PNC sell all the stocks and mutual
    >> funds in the account and distribute the cash proceeds to
    >> each of her heirs (my self included).
    >>
    >> The broker tells me that the cost basis for the sale of the
    >> stocks/funds would be the price which my mother originally
    >> paid for the security. I think that the cost basis is the
    >> FMV at the date of death.


    > You are quite correct. The only gains are from appreciation
    > since your mom passed. The estate tax return needs to
    > handle this before distribution to the heirs. If you have
    > any doubts on filling out the estate return, consider using
    > a pro familiar with the process.


    Could it be that the account belonged to a trust with your
    mother as beneficiary, rather than registered to your mother
    directly as an individual?

    In the case of a trust, I've been told that the broker may
    be right, depending on the details of the trust.

    I'm in the "trust" situation myself this year, and I'm
    trying to figure out the cost basis by delving into years of
    account history across two brokerages.

    (Disclaimer: I'm not a tax pro.)

    << ======================================================= >>
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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
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    << to this newsgroup as well as our anti-spamming policy >>
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    MyVeryOwnSelf, Sep 13, 2006
    #8
  9. Geo C

    tobe Guest

    "joetaxpayer" wrote

    > You are quite correct. The only gains are from appreciation
    > since your mom passed. The estate tax return needs to
    > handle this before distribution to the heirs. If you have
    > any doubts on filling out the estate return, consider using
    > a pro familiar with the process.


    From my estate/inheritance experience, using a tax
    professional, the estate usually passes on (no pun intended)
    any capital gains to the heirs via Schedule K1 of the estate
    income tax return, and the heirs subsequently pay any
    capital gains tax. In fact, this seems to be required in
    the final tax year of the estate (which, from the OP's
    description, will probably be this year).

    Since some States have estate income tax forms which are
    even worse than the Federal ones (e.g. Massachusetts), I
    also recommend that the OP consult a tax professional in the
    state of the deceased who has experienced with estate
    returns. I consider myself very experienced in (my own) tax
    returns (including, some years ago, an S-corporation
    return), and the Federal and State estate income tax returns
    were mostly incomprehensible to me.

    << ======================================================= >>
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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
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    << to this newsgroup as well as our anti-spamming policy >>
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    tobe, Sep 13, 2006
    #9
  10. Geo C

    Geo C Guest

    Thanks for your replies. I will use a professional.

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    Geo C, Sep 13, 2006
    #10
  11. >> You are quite correct. The only gains are from appreciation
    >> since your mom passed. The estate tax return needs to
    >> handle this before distribution to the heirs. If you have
    >> any doubts on filling out the estate return, consider using
    >> a pro familiar with the process.


    > Could it be that the account belonged to a trust with your
    > mother as beneficiary, rather than registered to your mother
    > directly as an individual?
    >
    > In the case of a trust, I've been told that the broker may
    > be right, depending on the details of the trust.


    Possible but unlikely. Most trusts are set up to be
    revocable, meaning that they are transparent for most income
    tax purposes. Even some irrevocable trusts are specifically
    set up as "defective," meaning intentionally created so that
    the person who sets up the trust is taxed on all the trusts
    income, or the property would be considered in his estate
    when he dies. (The grantor trust rules are slightly
    different with respect to income taxes as opposed to estate
    taxes.)

    > I'm in the "trust" situation myself this year, and I'm
    > trying to figure out the cost basis by delving into years of
    > account history across two brokerages.


    If the trust was a typical estate planning trust, you're
    probably in the clear and can use the date of death
    valuation. Take it to a tax attorney to review to determine
    if that's the case.

    Stu

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    Stuart A. Bronstein, Sep 15, 2006
    #11
  12. "tobe" <> wrote:

    > From my estate/inheritance experience, using a tax
    > professional, the estate usually passes on (no pun intended)
    > any capital gains to the heirs via Schedule K1 of the estate
    > income tax return, and the heirs subsequently pay any
    > capital gains tax. In fact, this seems to be required in
    > the final tax year of the estate (which, from the OP's
    > description, will probably be this year).


    My understanding is that it is the estate's option either to
    pay tax at the estate level or to distribute to
    beneficiaries and have them pay their own taxes. If there
    are multiple beneficiaries and the property qualifies for
    long term capital gain, it may be that the individuals are
    more likely to be taxed at a lower rate than the estate.

    > Since some States have estate income tax forms which are
    > even worse than the Federal ones (e.g. Massachusetts), I
    > also recommend that the OP consult a tax professional in the
    > state of the deceased who has experienced with estate
    > returns. I consider myself very experienced in (my own) tax
    > returns (including, some years ago, an S-corporation
    > return), and the Federal and State estate income tax returns
    > were mostly incomprehensible to me.


    I used to do federal estate tax returns years ago. But they
    have become so long and complex that I won't touch them
    anymore.

    Stu

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    Stuart A. Bronstein, Sep 15, 2006
    #12
  13. "ed" <> wrote:

    > Your broker would be correct if the account held funds from the
    > Bypass portion of a A-B Trust created while your father was alive.
    > In that case the stocks would be valued at your father's DOD with
    > no further step-up available. The A portion of the trust would
    > get a step-up in basis when your mother died. The account should
    > then have been titled under the Trust's name, not your mother's
    > personal name,


    Absolutely correct. Thanks for mentioning that - it's an
    issue I hadn't thought of.

    Stu

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    Stuart A. Bronstein, Sep 15, 2006
    #13
  14. > Thanks for your replies. I will use a professional.

    Could you post what you learn (if practical)?

    I for one am in a similar position and have heard divergent
    opinions from both professionals and regular folks.

    Thanks.

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    MyVeryOwnSelf, Sep 15, 2006
    #14
  15. MyVeryOwnSelf <> wrote:

    > Could you post what you learn (if practical)?
    >
    > I for one am in a similar position and have heard divergent
    > opinions from both professionals and regular folks.


    The reason that there seem to be divergent opinions is that
    the result is very fact specific. So I doubt more
    information will help you much unless you know exactly what
    facts are important and which aren't.

    Stu

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    Stuart A. Bronstein, Sep 15, 2006
    #15
  16. >> Thanks for your replies. I will use a professional.

    > Could you post what you learn (if practical)?
    >
    > I for one am in a similar position and have heard divergent
    > opinions from both professionals and regular folks.


    Are you suggesting that the professionals are irregular?
    I suppose it would be better to not amplify that line of
    thought.<g>

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    William Brenner, Sep 15, 2006
    #16
  17. Geo C

    ed Guest

    >> Thanks for your replies. I will use a professional.

    > Could you post what you learn (if practical)?
    >
    > I for one am in a similar position and have heard divergent
    > opinions from both professionals and regular folks.


    No offence intended, but generally a person gets conflicting
    answers because he/she doesn't know how to ask the right
    question. It's really quite easy to determine with a bit of
    research who's right and who's wrong on a specific topic.
    Why don't you post your question here (or on the Misc Tax
    board here you get immediate replies). I also suggest any
    trustee read Henry Abts' books on creating a Living Trust,
    and Settling a Living Trust. However, even Henry leaves
    you hanging on a few points, and is not totally accurate or
    even lucid regarding a deliberate GST that avoids any GST
    tax. Considering the size of his books (which in itself is
    quite impressive, but boringly repetitive) and the
    considerable advantages to GSTs a couple of pages on the
    subject would be expected.

    ed

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    ed, Sep 15, 2006
    #17
  18. >> I for one am in a similar position and have heard divergent
    >> opinions from both professionals and regular folks.


    > Are you suggesting that the professionals are irregular?


    I'll have you know I take Metamucil each and every day,
    thank you very much!

    Stu

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    Stuart A. Bronstein, Sep 16, 2006
    #18
  19. Geo C

    tobe Guest

    >> From my estate/inheritance experience, using a tax
    >> professional, the estate usually passes on (no pun intended)
    >> any capital gains to the heirs via Schedule K1 of the estate
    >> income tax return, and the heirs subsequently pay any
    >> capital gains tax. In fact, this seems to be required in
    >> the final tax year of the estate (which, from the OP's
    >> description, will probably be this year).


    > My understanding is that it is the estate's option either to
    > pay tax at the estate level or to distribute to
    > beneficiaries and have them pay their own taxes. If there
    > are multiple beneficiaries and the property qualifies for
    > long term capital gain, it may be that the individuals are
    > more likely to be taxed at a lower rate than the estate.


    I was quoted (by a tax professional) 26CFR1.662 as follows:

    "...There is first included in the gross income of each
    beneficiary under section 662(a)(1) the amount of income for
    the taxable year of the estate or trust required to be
    distributed currently to him..."

    In the final year of an estate (i.e. in the year the 'final
    estate income tax return is filed for), income is 'required'
    to be distributed currently to the beneficiaries, and thus,
    in that final tax year only, the opinion was that the
    beneficiaries had to claim and pay taxes on any estate
    income, including estate capital gain.

    Similarly, with regard to state taxation, Massachusetts
    includes the following instructions:

    "Effective for taxable years beginning on or after January
    1, 2005, estate and trust income includable in the federal
    gross income of a beneficiary by reason of Internal Revenue
    Code ("Code") § 652 (the section of the Code that determines
    the amount and character of the gross income includable by a
    simple trust beneficiary) or § 662 (the section of the Code
    that determines the amount and character of the gross income
    includable by a complex trust beneficiary) is no longer
    taxable at the estate or trust level; rather, it is to be
    taken into account in calculating the beneficiary's
    Massachusetts taxable income under G.L. c. 62, § 2.

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    tobe, Sep 16, 2006
    #19
  20. > No offence intended, but generally a person gets conflicting
    > answers because he/she doesn't know how to ask the right
    > question. ...


    TP set up two trusts, A (spousal) and B (bypass).

    Trusts' assets were invested in muni bond mutual funds.
    Distributions were reinvested the for many years. Aside from
    reinvested distributions, there were no asset sales or
    purchases for several years.

    State is Pennsylvania.

    In 2006 spouse died, funds were sold, and proceeds were
    divided among children of TP&spouse.

    How should basis of funds be calculated for income-tax
    purposes?

    How should capital gain/loss be split between long-term and
    short-term?

    Any tax gotchas?

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    MyVeryOwnSelf, Sep 19, 2006
    #20
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