What happens when a person owns stock at the time of death?
The executor/administrator/surviving spouse/kids don’t get on the phone with the banker the exact moment the decedent passes away in order to address assets owned in the decedent’s individual name. A person owning a stock in his/her individual name is very common. There is a gap in time between an individual owning the stock in his/her individual name — the individual passing away — and the transferral of stock to an estate or directly to the heirs/beneficiaries. A final tax return is filed for the decedent; however, it’s very possible that the decedent received a 1099 (or other tax documents) that doesn’t accurately reflect income that was truly “earned” while the person was living. Any income (or losses) received at any time after death should be attributable to a separate person or entity. Many times, this should be reported on an estate tax return, via 1041. The problem is, if you only report the income on Form 1041, it’s possible the decedent will get a notice, due to the fact that the 1099 with incorrect information has already been reported to the IRS, despite the fact the information is wrong. The IRS expected the income on the decedent’s 1040. Here is how to correctly report income on both the 1040 and 1041.
How to Prepare the Tax Returns
When preparing the tax returns, show the income on the 1040, with no gain/loss, with a Nominee notation. Then, report everything on the 1041 using the stepped-up (or down) basis. This will satisfy reporting requirements on the 1040, due to the fact that 1099s have been reported in the decedent’s SSN. At the same time, this will satisfy reporting requirements on the 1041, because this is where the income should be reported.
Proactive planning
Depending on the type of asset and state statute, you can retitle the asset prior to death. This can be done by putting the asset in a trust, adding another person to the account, an outright gift, or selling the asset. However, a person should consider the stepped-up in basis before taking any of these approaches. If you want to keep the asset in your individual name, you can likely create a transfer-on-death (TOD) designation which transfers ownership at the time of death, by operation of law, to a person of your choosing.
Obligatory Disclaimer: Nothing contained in this post constitutes legal advice. Nothing herein should be construed as or relied upon as legal advice. Everyone’s situation is different. Consult an experienced attorney, financial advisor, or tax expert before making any decisions.
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