stock distribution issues
My siblings and I are wondering what would be
the best choice regarding the inheritance of stock. Should we sell
the stock before we distribute the money, or distribute the stock
directly to each sibling? What are the tax implications? Thanks.
When you inherit property such as stock, you get a step up in its
cost basis to its current fair market value. The cost basis is used
for determining the gain or loss on the subsequent sale of the stock.
When a person dies, his (or her) assets pass to an
estate for purposes of administration such as probate until they
are finally distributed to the beneficiaries, either in-kind or
as a cash distribution.
An estate is a separate taxable entity during administration
and requires the filing of a separate tax return (Form
1041). Dividends and other income earned during the period of
administration are reported on this tax return and if tax is due,
it's paid. For example, if the stocks produce $1,000 in dividend
income a year, the estate will need to file a Form 1041 and pay
the tax applicable to that $1,000. If the estate earns less than
$600 for the year, no tax return is due. If a tax return is due,
the estate should apply for a tax identification number on Form
can do this online) and the executor of the estate should file
56 to establish authority to act for the estate.
Whether the estate should sell the stock or not carries
some tax implications, but you also have fiduciary responsibilities
to protect the estate's assets as executor of the estate.
Since the cost of the stock became the fair market
value on the date of death of the decedent, there probably will
be little or no gain to pay tax on if the stock is sold. When a
gain is realized, it will flow through to the beneficiaries if the
proceeds are distributed to them in the same tax year as the stock
is sold, and the estate will not pay tax. Loss on the sale of stock
will carry forward until utilized; if not used, the loss can pass
through to the beneficiaries on the final return of the estate.
The tax implications of distributing stock to a beneficiary
differs, depending if he (or she) is entitled to a specific bequest
or if he is a residual beneficiary. A beneficiary is entitled to
a specific bequest if the will provides that that person will receive
a set sum such as $5,000. If this is the case, and you distribute
stock to satisfy the bequest, the estate is treated as having sold
the stock and the beneficiary is treated as receiving $5,000. A
residual beneficiary is a beneficiary who receives a portion of
the estate. An example would be an estate that is divided equally
between two siblings. Distributions to residual beneficiaries go
to them at the date-of-death value, and no gain or loss is realized
by the estate.
As the executor of the estate, it is your responsibility
to conserve the assets of the estate for the beneficiaries. If the
assets consist of stocks, then you need to consider whether they
should be held or sold so as to guarantee value to the beneficiaries.
For example, if the estate consists wholly of stock in one company,
then you as executor need to consider the need to diversify the
Internal Revenue Service Publication
559 provides helpful tax information.