cost basis of bonds in estate

What you "know" is generally not accurate. During 2010 there is only a limited revaluation at date of death (up to $1,500,000 of gain can be so revalued). Otherwise, the basis of the securities is her purchase cost and date. Also, transactions that occurred between her death and setting up the estate are still the estate's transactions, not your brother's. Before you let your knowledge cause grief in the handling of the estate, I strongly urge you to get professional help.

I don't think your brother reports the income on his account. The estate reports it and either pays tax on it at the trust rates, or distributes the money via K-1 and each of the heirs pay it. Not sure which way it works.

In all years besides 2010, there is a step-up of basis at time of death. The acquisition date is probably also stepped up to the time of death. It sounds logical, but I haven't checked it. There is also something called the alternative valuation date.

In 2010, you get to step-up $1.3 million of gain only -- unless they repeal the special rule for 2010 retroactive to the start of the year. If the cost basis of the bonds was $500,000, you can step up $1,800,000 worth of bonds -- according to

again, bonds don't usually fluctuate that much in price. If you were amortizing your bonds then the cost price of the bond increases each year. Muni bonds must be amortized. So this makes the calculation more complicated.

If it wasn't his, he doesn't claim the income. But if his social security number were on the account, he might want to file a nominee 1099, showing that the income actually should be attributed to the estate.

That is to say for the property of people who die in 2010

One clarification: the step up in basis can be up to but no more than market value on the date of death.

If the link above doesn't work because it's too long, try this one:

(1) How do file a nominee 1099? (2) Is trust income paid by trust at trust tax rates, or distributed to beneficiaries via 1041 K-1?

My understanding is that a testamentary trust (or an estate) can elect either to pay taxes on income itself, or pass it on to the heirs to pay. The heirs will often be in a lower tax bracket than a trust.

 However, here is my question:  We sold

The estate came into existence when she died. Ideally, the account would have been transferred to the estate's EIN before any transaction(s), but the sale still belongs on the 1041, not on the final 1040. A note should be attached to the decedent's final return explaining where the sale is reported (this may not prevent a future IRS inquiry generated by their software, but it's easily explainable).

How do you attach a note when eFiling?

Lots of tax software allows you to attach any number of statements with free flowing text. I have no idea what the IRS does with those statements, but they become part of the e-file.

Be very careful with co-ownership. If it was with right of survivorship, then the assets go directly to your brother, regardless of what the will says. If there was no right of survivorship (e.g. tenants in common), then some of the assets (whatever fraction was owned by your brother, which need not be 50%) still go to your brother.

How the assets are reported on the Form 706 (estate tax, not to be confused with form 1041, estate income tax) may be different, though. On this form, it may depend on who funded the account. Generally, the IRS assumes that the deceased funded the entire (non-spousal) account (unless your brother can show otherwise), so 100% of the assets are reported as belonging to the estate _for estate tax purposes_. Note that this is on general principle; I haven't reviewed the quirks for 2010; nor is it intended as advice - just some background info.

I concur with Gene's response - work with a professional. No one here, without working with you directly, is going to be able to give information that you're sure is correct for your situation.

Mark Freeland snipped-for-privacy@nyc.rr.com

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I'm not sure that the executor has that degree of flexibility.

See the instructions for Form 1041, Schedule B, at:

"If the estate ... was required to distribute income currently or if it paid ... or was required to distribute any other amounts to beneficiaries ... complete Schedule B to determine the estate's ... distribution deduction [which becomes income to the beneficiaries]".

So the tax treatment doesn't seem to be elective; rather it depends on what was (or was required to be) distributed, not what works out better. The executor often does have leeway as to when assets are distributed, so in that sense the treatment of taxes may be "elective".

As to what "required to distribute" means, see the instructions for Form

1041, Schedule B, line 9. Roughly speaking, it means that the will states that certain income from estate holdings must be paid to the beneficiaries even if the assets themselves aren't yet distributed.

Mark Freeland snipped-for-privacy@nyc.rr.com

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