final 1040 or 1041 estate income?

[Catherine]

Oy.

Client was managing his dad's money in the man's final years.  Looking like the end was near, he put in stock trade requests on a Friday after markets closed or early Saturday; he does not recall which.  None of the orders were processed until Monday when the markets were next open.  BUT - his dad passed on, Saturday night.

So are these trades *before* death, as noted by the time of order submission - or are they part of the estate income, as noted by when the sales were actually done?  I can see a good argument each way.

Thoughts?  Even just a pointer on where to go looking because my initial forays into looking this up have not been helpful at all.

[Lion EA]

Off to a doctor's appointment, so no cites for you.  But, I always heard it was trade date.

With my aging clientele, I'll be interested in the answer, too.  (Not that I'm getting any older, though.)

[RitaB]

3 hours ago, Catherine said:

Oy.

Client was managing his dad's money in the man's final years.  Looking like the end was near, he put in stock trade requests on a Friday after markets closed or early Saturday; he does not recall which.  None of the orders were processed until Monday when the markets were next open.  BUT - his dad passed on, Saturday night.

So are these trades *before* death, as noted by the time of order submission - or are they part of the estate income, as noted by when the sales were actually done?  I can see a good argument each way.

Thoughts?  Even just a pointer on where to go looking because my initial forays into looking this up have not been helpful at all.

I looked briefly, then thought about it some - you use the price on for the trade date, not the price on the order date or the price on the settlement date.  It's gotta be trade date.  After all, the market was closed for business when he made the request.  That price and that date are not options after the close of business.

[SaraEA]

The decedent did not actually or constructively receive the cash from the sale until after death, therefore it definitely goes on the 1041. (Just like if he requested his RMD before death but the check didn't arrive until after.)

The real question is whether it is IRD or income to the estate.  This makes a difference because basis will be different.

Pubs aren't "authority," but Pub 550 mirrors the code:  " Securities traded on an established market.   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them." In your case, the trade date occurred after death, so I would say the estate sold them and gets stepped-up basis.  (The estate comes into existence at the moment of death, so there is no way the decedent could have sold the stock.)

Now the fun part of determining basis.  Since the person died on a Saturday, which is not a trading day, you get to do some fancy math. First find the high and low prices of the stock on Friday and average them.  Do the same for Monday's prices. There are three days between Friday and Monday, so you have to weight the averages:  (Friday's mean X 1) + (Monday's mean X 2)/3.  There is your basis. 

Note that the broker will give the decedent a 1099, so you'll have to report the sale on the final 1040 and back it out. Have fun, and do charge A LOT.

 

 

[Roberts]

Trade date.

If they entered a limit over to buy at a lower than the current market price - it could be sitting out there for 6 months before being triggered.

 

Sara, where do you get your instructions to weight the basis between days when they die on a weekend? Instead of doing all that, notify the brokerage firm of the date of death and the cost basis of the account should be adjusted automatically.

[RitaB]

8 minutes ago, Roberts said:

Sara, where do you get your instructions to weight the basis between days when they die on a weekend? Instead of doing all that, notify the brokerage firm of the date of death and the cost basis of the account should be adjusted automatically.

And if they don't, I wouldn't charge a client $100 to mess around with it a long time only to save him $10 in taxes.  I would take the most conservative price or even the middle of the road price [to arrive at FMV] and move on unless there is some wild fluctuation going on there. 

[Catherine]

5 hours ago, RitaB said:

unless there is some wild fluctuation going on there.

The price changes in the three funds in question moved by pennies each over the two days.  I think the biggest price swing was twelve cents per share.  

[Catherine]

Thanks, everybody!

[SaraEA]

IRS Reg. 20.2031-2(b):

If there is a market for stocks or bonds, on a stock exchange, in an over-the-counter market, or otherwise, the mean between the highest and lowest quoted selling prices on the valuation date is the fair market value per share or bond. If there were no sales on the valuation date but there were sales on dates within a reasonable period both before and after the valuation date, the fair market value is determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation date.

[SaraEA]

Roberts, you only dream that the brokerage will adjust the cost basis automatically!  The executor should request a date of death valuation from the brokerage (needed for probate).  Even though they receive it, I have only seen one major brokerage firm actually transfer those numbers into the estate account.  Part of the problem is that probate must appoint an executor, who must apply for an EIN, and only then can an estate account be opened and the assets transferred.  The process can take weeks. The broker may use the original purchase price or the price on the date of transfer--both wrong.  Some brokerages put the date of transfer into the "date acquired" column, so the sale looks short-term when it is always long-term with inherited assets.  And in Catherine's case, since the sale was initiated by the decedent, I would bet real money that he gets the 1099B.

The final 1040s I do usually contain many lines of "nominee" income, and the 1041s contain corresponding lines of "reported to xxx-xx-xxxx." And the "wrong basis" and "wrong type of gain" columns are heavily populated. I have never had the IRS question the entries, likely because they are so confusing they defer to my judgment (and math).

Catherine, since the stock price only fluctuated by pennies, unless your talking thousands of shares, there shouldn't be an issue with using the mean of Friday's mean and Monday's mean.

[Catherine]

12 hours ago, SaraEA said:

I would bet real money that he gets the 1099B

You won that bet, @SaraEA!  I will try the weighted average technique with the one thousand-share trade and see how much difference it makes.  All the others were tens or hundreds and with a few cents' difference in price it's likely not worth the bother.  

[Catherine]

Total difference in basis was $157, about 2/3 of which was in the client's favor and the other 1/3 went against him.  So all that saved him about $21 in tax, but it was an interesting exercise for me and I won't charge for the 15 minutes or so I spent on it.  lol