November 23, 2014

Did the Decedent Own Capital Assets?

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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

If the decedent owned capital assets, the fair market value (FMV) of those assets at the time of death must be determined for estate and probate purposes and for determining the basis of the assets in the hands of the beneficiary.

FMV is determined as of date of death (or an alternate valuation date in some cases when an estate tax return is required). This means that if the heirs sell inherited property soon after the decedent's death, the result will usually be little or no gain. FMV will be used to figure depreciation, as well as for figuring gain or loss on sale.

Valuation of inherited property is generally taken from the estate tax return (if any) unless the taxpayer (heir) can prove a different value. If there is no estate tax return, probate papers may provide an "inventory" showing values of items in the estate. If no probate is required, for example because all of the decedent's assets were held in a living trust, the trustee of the trust may have compiled a list of the property and their values and should be able to provide the information to the beneficiaries.

CAUTION: For assets inherited from decedents who died during 2010, the beneficiaries' basis will depend on whether the estate was subject to the estate tax or elected out of the tax and chose instead for the beneficiaries' basis to be determined under the modified carryover basis regime. Regardless of which method the executor selects—estate tax with stepped up basis for the assets or the modified carryover basis—a beneficiary should contact the executor for information as to the basis of assets that he or she inherits.

Stocks, mutual funds and other readily traded securities: The FMV of an inherited stock is the average of the high and low prices quoted for the stock on the valuation date (generally the date of death). If the date of death is a weekend or holiday, additional calculations are required. The stock listings for the date of death from a newspaper will provide the high/low information for most stocks or it can be found on various internet web sites. The fair market value of inherited mutual funds generally is the last quoted public redemption price on the date of death. For more complicated portfolios, contact the brokerage firm and request a listing of all securities held by the decedent along with the high and low quotes (or closing price if that's all it can provide) on the date of death.
Real Property: Depending upon state law, for estate tax and probate purposes, real property generally must be appraised by a qualified appraiser. However, if there is no requirement for probate or estate tax filing, then the executor or heirs will need to establish the FMV through other means such as a qualified appraiser or comparable sales.

The valuation process can be complicated, and it may be to your benefit to consult with this office as soon as possible for assistance.