USA Tax Liability of Fiduciary Brokerage Account

[rpg52]

I am the executor of my deceased aunt's estate.

Prior to her passing, we moved most of her assets into a single brokerage account with a major exchange house.

She passed in January, 2013 and I was appointed executor by the court in June, 2013. After establishing new estate accounts at both the brokerage and the bank at which she maintained her checking account, I distributed most of her assets (save some cash) to her designated heirs. The division of assets took place as a simple distribution of stocks, mutual funds, and cash into the heirs' brokerage accounts. During the time between her death and the distribution of the assets, the market (and the value of her securities) increased dramatically. However, I did no trading in the brokerage account during this period. This said, I believe her accounts did accrue some interest and dividends during this time.

I know I must file a personal income tax return for her as well as a fiduciary return for her estate for 2013.

My understanding is that her heirs' cost basis for the sale of these securities is the FMV on the day of her death.

My question is: what is the tax liability of the estate account? I believe it should be on just the interest and dividends earned during that time, and not the run-up in the values of the securities themselves. Am I correct?

Thank you for your response.

 

[Marshall]

You are partially correct.

There is no taxable gain in the increase in the value of her stock at her date of death. The step-up in basis is automatic.

A trust or estate is allowed a deduction for the amount of income that is passed out to the beneficiaries, on a Form K-1. The presumption is that distributions are made first from income. So it is likely in your case that the beneficiaries will pick up all the interest and dividends received by the estate. The taxable income of the estate, after the deduction is probably zero.

It is very important that the tax returns be properly prepared. It sounds as if you are not really familiar enough to do that on your own. You have a fiduciary obligation as the executor to make sure it is done correctly.

The estate assets should be used to hire a qualified tax professional to prepare the return. You should not risk breaching your fiduciary obligation by doing it yourself.

 

[rpg52]

Thank you for your reply, Marshall.

I will certainly hire a professional to take care of this final task. I simply wanted to know how much cash I should hold aside for taxes.

I appreciate your help.

Russ

 

[The Finance Writer]

I like the information and advice from Marshall. You mostly need to retain some cash to pay for the cost of preparing the final personal income tax return and the estate's income tax return. After you distribute the estate's income and corpus, the beneficiaries are not required to return any of it to you. The executor is personally responsible for expenses incurred on behalf of the estate.