How to Value Stock Inherited After the Death of Both Marital Partners with a QTIP Trust
Heirs selling inherited property in 2010 could face substantial capital gains tax because of a change in the method of determining cost basis under EGTRRA, the Economic Growth and Tax Relief Act of 2001. Effective January 1, "carryover basis" rules replaced "stepped-up basis" valuation. All inherited property sales including stock must now measure the gain using the lesser of the decedent's adjusted cost basis or fair market value at the date of death, instead of using the fair market value on the date of death. This change will now tax stock valuation gains while owned by the decedent as well as any gains realized after death.
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Instructions
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Records search
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Identify the stock purchase transaction date by reviewing old brokerage statements, tax returns, bank statements and checkbooks. If these sources are unavailable, call several brokerage firms in the area, identify yourself and the reason for your inquiry. They may be able to locate a closed account and may agree to send you copies of old transaction records. Be prepared to furnish documentation upon request.
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Price the stock on the decedent's date of purchase. You can obtain historical quotes free of charge from websites such as the Wall Street Journal's MarketWatch. If possible, the stock price should come from actual transaction records showing the price at the moment of trade rather than at the end of the day as a historical quote would show. Add brokerage fees to the purchase price to obtain the adjusted cost basis.
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Obtain a historical quote to fix the fair market value as of the decedent's date of death. The value of the inherited stock -- whether it came from a simple estate or as a distribution from a QTIP trust -- will be the lesser of the adjusted cost basis at original acquisition and the fair market value at the decedent's death. Cost basis may be increased by the $1.3 million allowed tax exemption for non-spousal heirs and by an additional $3 million for spouses selling appreciated inherited property.
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Tips & Warnings
Before making a decision to sell highly appreciated property, check on the status of tax laws and pending legislation regarding tax laws. EGTRRA expires December 31, 2010, causing estate tax laws to revert to 2001 status. One of these changes is that inherited property valuation will return to the "stepped-up basis" rule. When property is sold, only the appreciation from the decedent's date of death to the sale date is used to determine capital gains tax. However, Congress may retroactively reimpose "carryover basis" valuation rules in 2011.
Any decision to sell inherited property should be done with the assistance of a qualified tax and financial planner taking into account the special circumstances of the individual and not based solely on the movement of the stock market or the enactment of any particular law by Congress.
References
- Wilmington Trust: The Benefits of QTIP Trusts
- State Farm Insurance: Federal Estate Tax Update 2002-2010
- Kiplinger: FAQs on the Death of the Estate Tax
- Law Office of Donald D. Vanarelli Blog
- Ambrecht & Associates: Summary of the Economic Growth and Tax Relief Reconciliation Act of 2001
- The Wall Street Journal: MarketWatch
- Photo Credit Comstock/Comstock/Getty Images
