Ed of Randallstown has death and taxes on his mind.
"I am interested in what happens to inherited stock from a tax perspective," he writes in an e-mail.
He wants to know the consequences under a variety of scenarios: What if he doesn't know how much he paid for the stock? What if he donates it to charity? What if he gives stock to relatives?
Not knowing how much you paid for a stock - the cost basis - is problematic. And potentially costly.
In these cases, the Internal Revenue Service assumes the cost basis is zero, says Jeff Gonya, an estate planning lawyer in Baltimore. That could be a big tax hit if the stock has appreciated over many years.
Ed should try to track down the cost. He can check whether his broker still has a record of the purchase or ask if his broker or accountant can do a stock search for him, says Theresa Bandell, manager of Towson accounting firm Stegman & Co. Ed may have to guess the date of purchase if he doesn't know it, but the IRS will likely forgive a "prudent" estimate, she says.
Ed can also search for historical prices online at BigCharts.com, suggests Ray Cruitt, a librarian at the Enoch Pratt Free Library.
The library, too, has a variety of reference books and microfiche with old stock prices. The library is a good resource in cases where companies have merged or changed names. It also accepts search requests online at www.prattlibrary.org.
Now to Ed's tax questions.
By donating the shares to charity, Ed would be able to get a charitable deduction for the fair market value of the stock at the time of the gift, Gonya says.
What happens if he gives the stock to, say, a niece? It depends on whether he's dead or alive when he does it.
If Ed gives the stock during his lifetime, his niece will assume his cost basis on the shares, Gonya says. So, if she turned around and sold it, the capital gains tax would apply to the difference between what Ed bought the stock for and the eventual sale price.
If his niece inherits the equities through a will or by being named as a beneficiary on the brokerage account, she would get a step-up in basis. That means for tax purposes, the new cost basis of the inherited stock would be the price of the shares at the time of Ed's death. That would be true, too, even if Ed never discovered his original cost of the stock. "One of the advantages of death is it takes care of these basis issues," Gonya says.
Of course, individuals often give away stocks during their lifetime to reduce the size of huge estates that would be subject to taxes. But for the rest of us, it makes tax sense to pass appreciated assets on to our heirs at death.
Betty is the only child of parents who are now in their 90s. The 70-year-old has been living with her parents in their Ellicott City home for the past 19 years. She writes: "My father will not add my name to the deed as a co-owner of the house but did make me a `remainderman.' What exactly does that mean and is it better [tax-wise] or worse than being a co-owner?"
Your father made a smart move. There are plenty of horror stories of well-intentioned parents making a child a co-owner of a house.
It appears that Betty's father has set up a life estate deed with powers that allows him to sell the house anytime he wants, Gonya says. As part of that, Betty was named as a "remainderman," a term that hails from the Middle Ages. All it means, Gonya says, is that once her parents die, the house will automatically pass to her without going through probate. That's the court process where creditor claims are settled and the property is distributed.
"If Dad truly makes her a co-owner, then that is a gift and you may or may not have to pay gift tax," Gonya says.
But there are other potential problems of making a child a co-owner. If the parents wanted to, say, sell the house or take out a mortgage on it, they would have to get their daughter's permission, Gonya says. And if Betty has any creditors, they could place a lien on Betty's share of the house.
Also, with the life estate deed with powers, when Betty inherits the house she will get a step-up in basis. So, for tax purposes, the cost basis of the house would become the current market value. Since this is Betty's primary residence, if she later sold it she would be able to shelter the first $250,000 from capital gains taxes.
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