USA Inheriting stocks with a margin balance

[sbaker7398]

Quick question regarding options for inheriting an a account with a margin balance.

This all started with a recommendation from the broker for my mom to stop selling stocks and paying capital gains to fund her retirement. He recommended borrowing on margin to fund retirement with the benefit of avoiding cap gains altogether due to the step-up on death.

If my mother has an account with $1mm of very low cost basis stock and a margin balance of $250k and we are getting conflicting advice re the most tax efficient strategy at or near death. There seem to be three scenarios.

1) Prior to death, sell securities, pay of margin debt and pay capital gains based on original basis. Remaining balance goes to kids with stepped up basis

2) Upon death, sell securities, pay off margin debt and distribute to kids. There is some disagreement as to the cost basis of the shares that are sold – original basis or stepped up basis

3) Upon death distribute to kid both securities and margin debt, kids sell stock at the stepped up basis to pay off margin loan

 

[Drmdcpa]

You should not be able to distribute debt upon death. Debt is paid off by the estate before any net proceeds are distributed to heirs.

Not sure why you would sell stock just before death to pay off debt. Upon death under most circumstances basis is stepped up.

There are rare circumstances where step up is avoided. For example if the asset was gifted to an irrevocable trust during life.