Death bequest of cash or assets

[DMICPA]

Client passed away. 70 Million estate. Left 5 million to a nephew. Since the estate is largely in stocks, I figured that the bequest would be paid by selling 5 million in stocks and giving the nephew cash. There would be a slight gain or loss on the stock sale due to basis step up. Balance of estate to wife.

Wife wants to just give nephew 5 million in stocks and not sell anything. Therefore no gain or loss.

I think that whether the cash is given or the stocks or given, there should be no difference in the ultimate tax treatment.

Am I missing something here? There should be the same tax treatment either way shouldn't there be?


Bob

[S T]

Would it not be possible to pass the stocks onto the newphew with the Step UP value as of DOD, and then let nephew sell when he is ready to sell or trade? That way nephew reports any gain or loss from step up value to his gain/loss on his own personal return. at his own tax rate, not 1041 Fiduciary Tax Rate.

As far as stocks go, same would be true for the widow, she could take ownership of her step up, on her own personal return.

1041 Fiduciary would not be reporting any sale at all and no taxes at the 1041 Level.

Hopefully Burke and other Estate/Fiduciary Experts will weigh in on this post.

Sandy

[Burke]

Client passed away. 70 Million estate. Left 5 million to a nephew. Since the estate is largely in stocks, I figured that the bequest would be paid by selling 5 million in stocks and giving the nephew cash. There would be a slight gain or loss on the stock sale due to basis step up. Balance of estate to wife.

Wife wants to just give nephew 5 million in stocks and not sell anything. Therefore no gain or loss.

I think that whether the cash is given or the stocks or given, there should be no difference in the ultimate tax treatment.

Am I missing something here? There should be the same tax treatment either way shouldn't there be?Bob

Either way, tax treatment remains the same, except that such a large redemption may involve AMT issues, and perhaps that is what she is thinking to avoid. Hopefully, with that kind of an estate, she has competent attorneys who can deal with this issue. And too, it depends on what the will says (if anything) about cash or redemptions. If I were the nephew, or the wife for that matter, I would want the cash option. How is she going to determine which stocks he will receive? It's not like she can divide equally, but we don't know if it is all in one stock or 250. We don't have the date of death but the recent market is generally up so there may be significant gains on $5M. Also, it appears Iowa has inheritance tax issues which come into play since the bene is a nephew, so it is not just federal tax law to think about. It appears the personal representative is the one responsible for collecting and remitting that tax. I can see big problems brewing should she go down this road. She needs to talk with her legal advisor and if she doesn't have any, GET one.

[ChEAr$]

The legal issues here involve state law and what it says has to be done.

Burke's right that cooler legal heads will/should prevail.

FWIW, my own opinion is that state law will dictate the bequest be paid in cash.

[DMICPA]

In Cash or in Kind

I checked the will and it says "I give 5 Million dollars to my Nephew". However, under administrative provisions, the Will says that the executor may distribute property in "Cash or in Kind".

Client died early October so the market value can be slightly up or down from the basis step up. Client lives in California so no inheritance tax.

I would prefer to do the cash gift because that is so clear but the attorneys can give their advice to the client.

No matter how the distribution is made, the tax consequences would seem to favor giving the stocks in Kind and avoid any AMT if it applies.

At least this did not happen during tax season!

Bob

[New York Enrolled Agent]

Would it not be possible to pass the stocks onto the newphew with the Step UP value as of DOD, and then let nephew sell when he is ready to sell or trade? That way nephew reports any gain or loss from step up value to his gain/loss on his own personal return. at his own tax rate, not 1041 Fiduciary Tax Rate.

I think the notion of step UP should be minimized. As per §1014 the general rule for the basis of property acquired from a decedent is the fair market value on the DOD. That FMV could be (depending on circumstances) a step up or a step down in value from the decedent's basis. I'm not trying to nit-pick. I think the difference is important.

[DMICPA]

Step Up or Step Down

The new basis on Date of Death is the Fair Market Value, whether up or down.

The common term is the term step up but that is not always the case.

I also hear the term Tax-Free Exchange but we all know that it is a Tax Deferred Exchange in most cases.

In the estate scenario, one could also elect the alternate valuation date.


Bob

[Burke]

I checked the will and it says "I give 5 Million dollars to my Nephew". However, under administrative provisions, the Will says that the executor may distribute property in "Cash or in Kind". Bob

But that means $5M on the date the disbursement is made, not at the date of death. What does the nephew want here? And is he going to be a problem? That is the question.

[New York Enrolled Agent]

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In the estate scenario, one could also elect the alternate valuation date.

Base on the facts you posted, $5 million to nephew and all the rest to the surviving spouse, and assuming the client died in 2013, alternate valuation is not permitted. §2032 requires a decrease in the tax liability in order to use AV. If there is no tax, then AV can not be used.

[JohnH]

If somebody ever leaves me $5 million, I won't cause any problems. Cash or stock, makes no difference to me. No problems, I assure you.

[DMICPA]

Alternate Valuation date

Yes, that would be correct. There is no alternate valuation date unless there is tax.

Since there is no tax, no alternate date. The nephew gets the 5 million, whether in cash or stocks when the distribution is made.

[Burke]

If somebody ever leaves me $5 million, I won't cause any problems. Cash or stock, makes no difference to me. No problems, I assure you.

Me, either. $5M in cash -- no problem. $5M in stock -- who knows? He could have an issue with "which" stocks (or bonds, or REITS, or so on and so on), depending on the holdings. Some are better than others. It just gets more complicated, but it can be done with appropriate safeguards for the estate.