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Question:

I am the executor of an estate. There are stocks in the estate but the estate totals $1.8 million, thus under the federal estate tax threshold. The stock value at time of death in May was valued at $570,000. They are now worth $710,000. There are 10 beneficiaries. Obviously, I want to sell the stock and transfer the proceeds as per the will. Who pays the gain on the increase in the stocks value between time of death $570,000 and sale date $710,000 as of today? Is it the estate or is it each of the 10 beneficiaries? If it’s each beneficiary, I assume I have to prepare k-1 forms to each for their share of the gain. If it’s the estate, than can I net the tax paid against the gain and distribute to all 10? Lastly, must I use the date on death value or can I establish an alternative date as it’s been over seven months since the decedent passing and I have not yet been able to have the stocks transferred into the estate account to be able to sell (due to a disclaimer issue).

Response:

It can be difficult to get control of stocks in an estate, especially if they’re held in certificate form. Fortunately, in your case the market has been up quite a lot this year, so they’ve increased in value rather than declined. The easiest way to distribute the stock would be to liquidate the holdings and distribute the resulting cash. But, as you know, that would mean incurring about $140,000 of capital gain. You could avoid this by divvying up the stock holdings among the 10 beneficiaries so they can each decide when they want to incur capital gains. The smoothest way to do this would be for each beneficiary to open an account at the investment house where the stocks are held. But given the larger number of beneficiaries, that is unlikely to happen. Even one beneficiary not getting around to setting up an account would delay the distributions for everyone. So, I think you’ll have to liquidate the stocks and distribute cash, even though this will mean about $14,000 of capital gain for each beneficiary.

When you do that, the gain will pass through to the beneficiaries and you will have to each each a k-1. I would recommend hiring an accountant to prepare the estate income tax return and he or she can prepare the k-1s. The difficult part from your end is that you will have to obtain Social Security numbers and addresses from all 10 beneficiaries to supply to the accountant, but that’s still a lot easier than getting them to open accounts at investment firm.

In terms of an alternative date, the estate tax law does permit the use of a date six months after the date of death if using the valuation on that date would reduce the estate tax due. That’s not available to you both because the estate owes no taxes and because using the alternative date in your case increases, rather than reduces, the value of the estate.

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