Last week, we talked about “Ivan” and the challenges he faced 20 years after his grandparents gifted him stocks. If you recall, Ivan was thinking about selling the stocks, but first he had some hurdles to overcome. He had to find out his grandparents' cost bases (the original prices) for the various stocks he received as gifts decades ago. He also needed to find the cost bases of the additional shares he himself purchased through dividend reinvestments.
Depending on the records Ivan already had on hand, there potentially was a lot of work ahead for him. He would need to consult with a tax adviser or accountant to form a game plan for gathering the missing information.
Last week’s column focused on gifts. What about inheritances? E.B., a longtime reader of this column, wanted to know: “I had always understood that -- upon my death -- the stocks which my children will inherit will have the date of my demise as a cost basis. Am I wrong, or is the tax law different for gifted stock vs. inherited stock?”
E.B., thank you for asking. Here is a quick answer: Yes, the tax laws differentiate between stocks your children inherit from you and stocks that you gift to them during your lifetime.
First, before diving into the differences, let me remind you to be sure to talk with your tax adviser before taking any action. Each taxpayer’s situation is unique, and the tax laws can be complicated.
Now, let’s review some basics. First, what does the IRS say about inheritances? The resource is IRS Publication 551, “Basis of Assets” (tinyurl.com/ydy2pqmr). Under the section titled “Inherited Property,” you’ll see the paragraph:
“The basis of property inherited from a decedent is generally one of the following,” with the first situation enumerated being: “The FMV [fair market value] of the property at the date of the individual’s death.” There it is.
But, notice the word “generally.” Again, this is why you need your tax adviser at your side before taking any action.
You should be aware that the estate may choose to use an “alternative valuation date” other than the date of death. For more information, read the Instructions for Form 706 (tinyurl.com/ycn7q6xa); Section 2032 of the Internal Revenue Code applies (tinyurl.com/y974sp29).
The remaining situations address other assets, such as farmland, not stocks.
In most situations like E.B.’s, the cost bases of the stocks will be determined on the date of death (or an alternative valuation date), unlike a situation involving a gift.
As to whether an alternative date needs to be considered, your tax adviser will step in, since the decision depends on an individual’s particular tax situation.
The rules for inheriting a tax-deferred account, such as an IRA, are more complex, and that’s something I’ll discuss in a future column.
On another matter, if you are interested in the basics of retirement investing, join me for a virtual presentation, “You’re retired -- it’s time to revisit your financial plan.” It will be held on Wednesday, March 17, at 1 p.m. EDT, and is sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/3paf657y or contact Yang Wang, 203-622-7924, email@example.com.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org). Please visit www.juliejason.com.
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