The Personal Representative
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Selling Assets in an Estate – Taxation, Some Basics
*Before the personal representative sells assets in the Estate Settlement process (turning assets into cash equivalents) there are some important issues to consider prior to taking any action. One of the issues for the personal representative to consider (but not the only one) is the potential tax implications.
Importance of Step-Up in tax cost basis on death
Tax policy in the United States for US citizens allows for an asset’s tax cost basis to be adjusted upon the death of the decedent. This is called the "step up" in tax basis and valuation and it can have very significant implications.
For example: Joe Smith died March 10th 2007. Joe Smith worked for ABC Company for 25 years and accumulated 5,000 shares of ABC common stock. Joe Smith’s accumulated average tax cost (basis) on ABC stock was $10 per share and $50,000 tax cost basis for all of his ABC shares. On Joe Smith’s date of death (March 10, 2007), assume the average closing price on ABC shares was $60 a share. The value on ABC stock for Estate Settlement purposes (excluding the alternative valuation date) is $300,000.
The difference between his cost (basis) of $50,000 and the $300,000 date of death value is a $250,000 profit or gain. If Joe Smith would have sold his stock during his life time at $60 a share he would have recognized for federal income purposes a $250,000 long term capital gain (assuming asset held over a year). This would have resulted in a personal income tax liability of $37,500 (assuming a 15% capital gains rate, $250,000 X 15%).
If the shares were to be sold the day after his death ( March 11, 2007) for $60 a share the tax cost basis would be raised to $60 per share or $300,000 on all the shares and there would be no capital gain and no personal federal income taxes due, regarding this sale. The “step-up” in tax cost basis on death resulted, in essence, a tax savings of $37,500.
IMPORTANT FACT: The "step up"occurs AFTER midnight on the decedent’s date of death. If assets are sold on the same day as the date of death there is no step-up and a huge capital gain may be recognized. Attention trustee’s, don’t rush in and sell assets the same day someone dies!
All assets titled in the decedent’s sole name get the same step-up in tax basis for federal Income tax purposes including: bonds, real estate, Art, collectibles, business ownership, etc. Obviously assets that have the highest appreciation have the greatest tax savings via the “step- up”.
After the step-up the tax basis for the estate federal income tax basis is $300,000 or $60 a share. If in June of 2007, the personal representative sold the shares for $65 a share, it would result in (all other things being equal) a tax liability of $3,750 ($25,000 X 15%).
Alternative Valuation Date (Estate Tax Return Calculation Form 706)
The personal representative and tax preparer have the opportunity to use the date of death value for tax purposes or that have the option to use the “alternative date of death value” when an estate tax return (706) is to be filed. The alternative date of death value is determined by the value of assets 6 months after the date of death.
For Joe Smith, his alternative date of death for tax purposes is September 10, 2007. If this date is elected, all the assets in Joe Smith estate are valued at September 10. 2007 price levels. To be noted, if the alternative date is selected then valid valuation prices (appraisals) will be required on all assets for both dates; the date of death, (March 10 , 2007) and the alternative date September 10, 2007.
Again, using the Joe Smith’s example The personal representative and tax preparer could use the valuation date of September 10, 2007 (lets assume ABC stock is now at $70 a share) the estate can claim the $70 a share tax basis and not pay the capital gain tax of $7,500 (assuming 15% X $50,000).
How about when assets are sold before the alternative date?
The alternative date of death valuation method is selected for estate purposes.
Then… All of the estates assets values and cost basis’s change to the value on their alternative date.
If… Assets are sold after death, but before the alternative date of death date.
Then…The valuation and tax cost basis is the value the asset was sold at.
In the Joe Smith, example:
If ... The personal representative selected the alternative date of death date of September 10, 2007.
But Then… The shares were sold in June for $65 a share.
Then… The valuation price for the estate and the tax cost basis for federal income tax purposes, would the be sale date in June and the income tax cost basis would be $65.
The Result…This would result in no capital gain tax due regarding the sale of all of Joe Smith’s ABC shares. All other assets (if not sold) would be valued and have a tax cost basis as of September, 10, 2007 on the 706 estate tax return.
To be noted is that, the value of any asset could be higher or lower on the alternative valuation date vs. it's date of death value.
In addition, shares or any asset do not necessarily require being sold by the personal representative. If and when it is in the parties’ best interest, shares and an asset cost basis can be transferred “in kind” to any or all beneficiaries. Under this circumstance the Will, court, or governing document must allow for “in kind” distributions.
*Disclaimer: In all important matters and before taking any action, seek the advice of a qualified attorney and tax professional. Information on this web site should not be construed as being specific advice or recommendations to any individuals regarding their personal circumstances.
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