Stock sold on date of death

[warrenag]

A person passes away at 6PM. The executor of the estate was advised by an attorney that he should sell his mother's stock prior to her passing, to avoid any estate tax issues.
The stock was sold ~ 2:30PM of the day, prior to moment of death. Is there any way to have the stock sale be included with the estate, thus getting a stepped up basis, or is the decedent going to get stuck with the capital gains on AT&T stock accumulating since the 60's . ANY LOOPHOLE OUT THERE????

[outwest]

Wow..

some advice from the attorney. I think this question is one that you are going to have to research case law. Even though the stock broker was called that day, settlement is usually a couple of days later, maybe that will give you a hook to hang your hat.

I'd be looking for court cases.

[JohnH]

One good outcome

At least the executor has gained one piece of valuable information from the situation:
He knows an attorney in town whose advice he should never seek in the future.

[Jiggers]

Stock sold too soon

A person passes away at 6PM. The executor of the estate was advised by an attorney that he should sell his mother's stock prior to her passing, to avoid any estate tax issues.
The stock was sold ~ 2:30PM of the day, prior to moment of death. Is there any way to have the stock sale be included with the estate, thus getting a stepped up basis, or is the decedent going to get stuck with the capital gains on AT&T stock accumulating since the 60's . ANY LOOPHOLE OUT THERE????

It says that the executor sold the stock before his mother's death. He can't be an executor until after the death.

How much stock was sold? And, what is the value of her estate? Need to know those answers to determine if the attorney was advising correctly or incorrectly.

[Golden Rocket]

Settlement Date

If you're looking for a way out, examine how the timing of the sale may be postponed until the "settlement date." I have known situations where the one-year holding period has been saved because the transaction wasn't effective until the "settlement date," and a couple more where the settlement date determined the year of sale, and the brokerage statement did not include the transaction on the 1099-B until the following year.

Don't just assume this, research it on your own. I'm just saying this might be a way out.

Attorneys cause my clients to pay a lot in taxes too, but before jumping to a conclusion, let's make sure he is wrong. Taking 15% on the chin might be better than taking 35%.

[Davc]

The attorney is wrong, but we don't know in exactly how. If the stock was sold and the proceeds were not gifted to someone else then the value of the estate didn't change. If the proceeds were gifte, then the gift is considered in the estate under the following:

Sec. 2035. Adjustments For Certain Gifts Made Within 3 Years Of Decedent's Death

2035(a) Inclusion Of Certain Property In Gross Estate.--
If--

2035(a)(1)
the decedent made a transfer (by trust or otherwise) of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent's death, and the value of such property (or an interest therein) would have been included in the decedent's gross estate under section 2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death, the value of the gross estate shall include the value of any property (or interest therein) which would have been so included.

[Snaggletoof]

Double Dip

[QUOTE=Attorneys cause my clients to pay a lot in taxes too, but before jumping to a conclusion, let's make sure he is wrong. Taking 15% on the chin might be better than taking 35%.[/QUOTE]

GR have you misfired on this one? The attorney has caused this taxpayer to have to pay 15% on the gain. The value in the estate used to include the FMV of the stock, now it includes the cash made on the sale. So if he has to pay estate tax he pays 35% on the same dollar value. The FMV dollars never left the estate.

The attorney was a klutz.

[Jiggers]

Still don't have the answer from "Warrenag"

If the estate was under the $2,000,000 level, including the FMV of the stock, then the attorney made a mistake.

[joanmcq]

If the stock was in the estate it would be valued at FMV. Cash in the estate (from the sale) is still valued at FMV. Estate $$ are the same.

Question is, how much can he sue the attorney for?

[warrenag]

1099-b

1099-B shows date of sale August 21st, same as the date of death. I will do some added digging to find out the settlement date.
The transaction was a straight sale, no gifting. Cash was then put into a fund for future distribution to beneficiaries.

Granted the capital gain will be taxed at the max, 15%, but the additional income has caused much more of the SS to be taxed, medical deduction was reduced by a couple thousand and the added burden of NYS tax on the gain @ 7%. All in all, tax will be about $10,000. ((
Not selling until after the D/O/D would have caused no tax because of the stepped up basis. Attorney definitely blew it, his explanation was "Hey, I'm not a tax attorney" I believe he has at least one less client

[RLymanC]

Sale Date

You have sold the securities on the "sale date." the settlement date does not change the sale to a later date.

Stock sold on Dec. 30, 2007 settlement date Jan 4, 2008. Sale is reported on the 2007 tax return.

[Jiggers]

What is the value of the estate with the FMV of the stock?

1099-B shows date of sale August 21st, same as the date of death. I will do some added digging to find out the settlement date.
The transaction was a straight sale, no gifting. Cash was then put into a fund for future distribution to beneficiaries.

Granted the capital gain will be taxed at the max, 15%, but the additional income has caused much more of the SS to be taxed, medical deduction was reduced by a couple thousand and the added burden of NYS tax on the gain @ 7%. All in all, tax will be about $10,000. ((
Not selling until after the D/O/D would have caused no tax because of the stepped up basis. Attorney definitely blew it, his explanation was "Hey, I'm not a tax attorney" I believe he has at least one less client

Just curious, what is the value of the estate with the FMV of the stock? Did it go over the $2,000,000? If it didn't, there wouldn't have been any inheritance tax. I am not sure about NY inheritance.

[Golden Rocket]

Bad advice either way

Whether the estate is over $2MM or not, it looks like the attorney's advice has cost this customer $10,000 either way. The estate is measured by the value of the assets, whatever it's numerical extent. If the stock was worth $100,000, then that amount would have been includable in the estate. It is no longer in the estate, but now it would includes $100,000 in cash. Total dollar amount of the estate is the same, irrespective of whether it is over the threshhold or not.

The only thing NOT in the estate is the recognition of the taxes on the sale, in this case a $10,000 liability. But the liability wasn't necessary.

[Jiggers]

Bad advice

Whether the estate is over $2MM or not, it looks like the attorney's advice has cost this customer $10,000 either way. The estate is measured by the value of the assets, whatever it's numerical extent. If the stock was worth $100,000, then that amount would have been includable in the estate. It is no longer in the estate, but now it would includes $100,000 in cash. Total dollar amount of the estate is the same, irrespective of whether it is over the threshhold or not.

The only thing NOT in the estate is the recognition of the taxes on the sale, in this case a $10,000 liability. But the liability wasn't necessary.

But, if the stock was in the estate, and the estate was under the $2,000,000, there is no inheritance.

And then if the stock is sold in the estate or by the heirs, there is the step-up in basis and no taxes at all.

If this is the case, maybe the attorney needs to be sued.

[Roland Slugg]

A couple of remote possibilities

All the replies above are good ones, and the attorney was probably wrong to give such advice. I would definitely ask him why he made that recommendation. (And if he wasn't a tax attorney, why was he giving tax advice?)

However, there are scenarios where the advice would be sound ....

> Mother had a capital loss carryover.
> Mother has other capital losses in the year of death.
> Mother would have had "negative" taxable income which would absorb the gain on the sale.
> The stock's basis was higher than its FMV on the DOD.

None of the above would appear to be correct in this case, as the original poster states in a follow-up post that the sale increased her personal taxes by about $10k. However, in another case some of the above could be true, and the recommendation to sell would result in a tax savings.