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TOPIC: Cost basis of stocks in trust when not distributed for years

Cost basis of stocks in trust when not distributed for years 1 year 7 months ago #1

My mother died over five years ago, years after my father died. The assets in the trust they set up for my brother and I were largely looted by my brother in the last few months of our mother's life, but a brokerage account still contained stocks and bonds. Distributions from that account were administratively frozen shortly after my mother's death by the brokerage firm, pending a court order. After five years of my brother's legal maneuvering to get to the assets of that account too, ending with a trial, I was named sole trustee of the remainder of the estate, including everything in that brokerage account.

I read that cost basis of stocks are set at the death of the second parent, but I'm thinking that would assume a quick distribution. Since I only just received the trust distribution, is it possible to consider the cost basis what it was when the account was unfrozen and distributed rather than the date more than five years ago when my mother died?

Thank you for your advice.
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Cost basis of stocks in trust when not distributed for years 1 year 7 months ago #2

  • Michael P. Pancheri
  • Michael P. Pancheri's Avatar
Hi gwenlyle,

Unfortunately, the step-up in basis that you refer to is provided under Internal Revenue Code Section 1014, which reads in part as follows:
Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—
(1) the fair market value of the property at the date of the decedent’s death,
(2) in the case of an election under either section 2032 orsection 811(j) of the Internal Revenue Code of 1939 where the decedent died after October 21, 1942, its value at the applicable valuation date prescribed by those sections,
(3) in the case of an election under section 2032A, its value determined under such section, or
(4) to the extent of the applicability of the exclusion described in section 2031 (c), the basis in the hands of the decedent.
You can read the entire text of IRC Section 1014 here.

Please note that subparagraph (2) of IRC Section 1014 refers to the alternate valuation date, which allows for the valuation of assets at their fair market value as of a date 6 months after the decedent's death. However, to elect the alternate valuation date, you must timely file the estate's federal estate tax return (Form 706) and the alternate valuation must be lower than the date of death value.

The fact that the stock was not available to you for 5 years or so after your parents' death, does not alter the step-up in basis rule under IRC Section 1014, which is the value of the stock as of your surviving parent's date of death. I suppose some solace can be gained from the fact that the stock actually appreciated in value during this period, since many stocks actually lost value during that time. And, those who might have lost value based upon a step-up in basis under IRC Section 1014 are not permitted to deduct their loss. Such is the workings of the tax laws.

One further point, many people acquire stock from an estate via an inheritance and never sell the stock until many years later. When they do sell, the step-up in basis (date of death value) is the starting point in determine their gain/loss on the sale. The fact that they held on to the stock for many years does not alter the step-up in basis for that stock. Of course, subsequent stock splits, reinvested dividends, etc. many require subsequent adjustments to the date of death valuation in order to determine the actual basis for the stock when sold.
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