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Dear Liz: My father died in June, and I inherited part of his stock portfolio. I understand in 2010 there is no estate tax but have heard different opinions (from my tax advisor and two financial advisors) as to what my tax basis will be when the stocks eventually are sold. The opinions are that 1) I will get no step-up in tax basis, so that I will pay tax on the difference between the sale price and what Dad paid for the stocks; 2) that I will get a 100% step-up, so that the stocks will get a new basis based on their value at Dad’s death, which would minimize capital gains taxes; or 3) some combination of the two — basically, a certain portion would have the step-up allowed and the balance would not be eligible for the step-up. Can you clarify?

Answer: You’ll need to talk to the executor of your dad’s estate.

Here’s why. When there is an estate tax in place, the assets in people’s estates get “stepped up” to their value at the time of the person’s death. This is a huge boon to the vast majority of estates. Most people’s estates don’t owe estate taxes, but they still get this favorable tax treatment so that no tax is paid on the gains that occurred during the person’s lifetime.

When the estate tax disappeared for 2010, the step-up rules changed as well. Each estate instead is allowed $1.3 million of step-up, which the executor can allocate any way he or she wants, said estate attorney Burton A. Mitchell of Jeffer Mangels Butler & Mitchell in Los Angeles, although no asset can receive a step-up that’s more than its fair market value.

If your father’s estate had less than $1.3 million of unrealized capital gains, then all of your inherited portfolio gets a step-up in tax basis. If the gains exceed that amount, however, some or none of the portfolio would get the step-up, depending on the executor’s decision.

The executor has to file a form with the IRS outlining how the step-up is allocated. This form is due with the decedent’s final income tax return, Mitchell said.

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Categories : Estate planning, Q&A, Taxes

2 Comments

1

The tax treatment is one of several reasons why it is important to try to get the executor to split individual holdings in the proportionately, rather than give different groups of stocks to different beneficiaries. This may not always be practical with smaller portfolios, but it size allows it makes sure that each beneficiary gets a more balanced, diversified set of holdings, and that there is no potential for a disproportionate tax liability for any beneficiary.

2

Don’t forget about the California rules. Still step up value for California taxes. Could be different basis for federal than California.