Investments and Filing Status

I recently inherited a large value of Bank of America corporate bonds, which were bought through Chase Bank, about 7 years ago. They are still with Chase. They earn high rates of taxable interest. Any gain I make on selling any portion is also taxable. These just came into my possession, so I have not had to consider them when filing tax returns, but will for

2011.

I am married and file jointly in California.

Is there any tax advantage or disadvantage as to how this investment is held, currently held by me alone? Are they treated as community property for tax purposes since I file married jointly? Any tax reason to put bonds in both names?

Reply to
Glen
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Your basis in this investment is the fair market value of the bonds on the day the decedent died. If that was recently, you should have little gain or loss if you sell the bonds now. If the death occurred a few years ago, your basis could be significantly below current value and you would have a gain on sale.

I know almost nothing about California community property law but I would be surprised if tax filing status had anything to do with whether the bonds are community property.

There is no federal tax reason I know of to put the bonds in both names. Doing so could, however, convert non-community property into community property.

Reply to
Bill Brown

If you file a MFJ return income from these investments are included in your joint return. But if you file a MFS separate return, income from inheritance is considered separate property unless you hold the shares in a joint account -- so the income would only appear on your MFS tax return, not on your spouse's, but as long as the shares are not treat as being jointly owned. Practically, you'd probably never file MFS in California because in most cases that would result in more federal tax. As far as divorce goes, it's not a subject I know much about, but I think if you divorce then the inherited shares are not split

50/50, unless you put the shared into a joint account.
Reply to
removeps-groups

You're right, it doesn't.

Under §1014, the basis on both halves of community property get stepped up when an owner dies, not just the decedent's half. That's possibly one reason to convert appreciated property to community property.

Reply to
Stuart Bronstein

Bill Brown wrote in news: snipped-for-privacy@w24g2000yqb.googlegroups.com:

Thank you all for your replies.

But, maybe I didn't give enough information. I thought the basis was set when probate closed and the court authorized final distribution of all assets, including the bonds. Here's some more details.

The decedent (my brother) died January 2010, with the bonds and the money market checking account into which interest was swept every quarter, in his name alone. If memory serves me, the bonds were purchased in 2004. I was named executor and sole heir in the will, and the court appointed me executor in April 2010, and in the same month, I changed the bond account and money market account to add my name to both, as executor.

My (retired since 2002) brother hadn't filed his taxes for 2005 - 2009. I hired a CPA to do this on behalf of his estate. His only income was a small pension and bond interest. But, he did cash in some bonds on two occassions, for which he had a loss. The CPA included his pension income and claimed both short term losses and long term losses (short term carryovers), as appropriate on the returns. All taxes and penalties were paid, and his taxes are up to date.

The bonds contnued to earn substantial interest, which was automatically deposited to the money market account in Feb, May, Aug, and Nov of 2010.

1099 forms for 2010 came with both our names. In December 2010, probate was completed and final distrubution of all assets was allowed. This month, I did my brother's taxes, and his only income was the bond interest of Feb, May, Aug, and Nov. Since final distrubution was not court established until Dec 2010, I assumed that interest income was to go on my brother's 2010 return. Perhaps I was incorrect, and should have let the CPA handle this. Yes? No?

The names on the accounts have not been changed yet, and still show both of us. In Feb 2011, another quarterly interest payment was made to the money market account. Although the account still has both our names, with me as executor, I will claim this interest on my 2011 return, since this interest income came after final distrubution was to be made.

The point I'm at now is whose name should I put on the accounts when I do make the change. Just mine, or both mine and my wife's?

I'm thinking I should go back to the CPA for both tax advice, and advice on making ownership changes to these accounts.

Reply to
Glen

Well... you should probably have relied on the CPA to begin with. Your cost basis of the assets you inherited is the fair market value of the assets on the date of death. However, because your brother died prior to the retroactive changes made by the Tax Relief, Unemployment and Insurance Reauthorization and Job Creation Act of 2010, an election can be made to use the law that existed on 1/1/2010. Those rules said that the cost basis for determining gain or loss upon a taxable sale or exchange of inherited property is the lesser of its fair market value at the decedent's death or the decedent's cost basis in the property.

As your brother died in January 2010, any income that he was entitled to but came in after death is known as IRD (Income in respect of the decedent). It does not belong on your brother's 2010 tax return. It would appear, that the right to the money transferred to you when you put your name on the account in April 2010. As such, the Feb 2010 interest payment belongs to the estate and someone should have filed an income tax return for the estate (Form 1041). Subsequent interest payments belonged to you and should have been reported on your 2010 tax return. As distribution took place in Dec. 2010, the estate would have reported the income on its 1041 return and a 1041 K-1 would have transferred the interest income to you. You should have reported the

2010 interest on your 2010 tax return. Even if one argues that the interest payments in 2010 all belonged to the estate and all should have been reported on the estate 1041, the end result would still be the same as the 1041 K-1 would have transferred all the interest to you. The net of this is that the interest for 2010 should be on your 2010 tax return either because the first interest payment should have been transferred to you via the K-1 or all the interest payments should have been transferred to you via a K-1.

You need to have your brother's 2010 tax return amended if it included the interest and you need to amend your return if you did not include the interest and someone needs to file a final 1041 for your brother for

2010.
Reply to
Alan

Nothing wrong with Stuart's replies. However, the step up in value for

100% of community property versus only 50% step up only comes into play when you are dealing with joint property vs community property. In this instance, we have separate property. If the beneficiary is married and dies before his spouse dies, the separate property would get the full 100% step up as long as at the time of death it was separate property or had been converted to community property. The beneficiary would not want to convert appreciated property to joint property if living in a community property state.
Reply to
Alan

Right. But if the spouse dies before the owner of the separate property, he gets no step up in basis. If it changed to community property, both halves get stepped up basis irrespective of which one dies first.

Reply to
Stuart A. Bronstein

However, the problem is: Inherited property is NOT community property in California, unless converted (such as by adding the spouse's name).

On an MFJ return, it makes no difference as one is combining what both spouses have.

The basis step-up argument is meaningless as the spouse is the default inheritor and even in non-CP states, there's still a 100% step-up of separately-held property of a decedent.

On an MFS return pair, I would allocate 100% of the asset (as inherited property) to the spouse who inherited it.

As to basis, it is the FMV on the date of death of the bequestor (unless an estate return electing alternative valuation was filed, or the year of death was 2010). it is NOT the FMV when probate concludes.

Reply to
D. Stussy

As long as the owner spouse dies first, you're right. If the other spouse dies first, there will be no step up in basis when the property remains separate.

Reply to
Stuart A. Bronstein

True

Reply to
Alan

Meaningless? I know nothing of community property law, but a lot about how those in Ohio apply common law property law when filin MFS returns.

So lets take a simple example of inherited stock in California and it is sold for a $6000 loss. 3000 is allowed against ordinary income and 3000 is carried forward. Next year one of the spouses dies.

Decision is made to file MFS.

Does each spouse get a 1500 carryover or does the one who inherited get the full 3000? And since filing MFS, the deceased spouse will not be able to flly use the 3000 remnaining loss on inherited stock?

Reply to
Arthur Kamlet

Your example [snipped] tells me you didn't understand what I was calling meaningless.

There is no difference between the step-up of 100% of separate property inherited by a spouse and the 100% step-up of community property inherited by the spouse. Both ways, the step up is 100% to FMV and the new owner is the spouse. There is only a difference in non-CP states, where the jointly held property only gets a 50% step-up.

Reply to
D. Stussy

There is one difference. The 100% step-up in basis does not apply to separate property if the "wrong" spouse dies first. With community property it applies whichever spouse dies first.

Reply to
Stuart A. Bronstein

And also, the law that existed on 1/1/2010 allows the cost basis of bonds to be stepped by $1.3 million. If the brother bought bonds a long time ago paying 7%, then with interest rates about half of that today, these bonds will be worth a lot more.

A side note: Cost basis of bonds may not necessarily be the value paid for the bond. Muni bonds are amortized and thus their cost basis may increase or decrease each year. Taxable bonds usually have a fixed cost basis, but the taxpayer can elect to amortize their bonds, just like they have to do for munis.

The above does not make sense to me. Are you saying that because it took him a few months retitle the account, the some interest payments would be on brother's 1099-INT, and thus these get transferred to the current person's 1040 via the K-1?

Are you sure that amounts in the estate must be distributed? Suppose the estate received $1800 of interest in 2010. It might be better for the estate to keep the money and pay tax at the extremely high trust tax rates. This is because the estate gets to subtract deductions (probate costs, advertising in newspaper costs, CPA filing 1041 costs) and gets a $600 exemption. If the estate has under $600 of income, then after the exemption the taxable income is $0. I'm not sure how funeral expenses are deductible; maybe they're deductible against the assets of the estate, not against the income.

Reply to
removeps-groups

I assumed the distribution took place in Dec. 2010. I was merely making the point, that once the brother died, any interest that came in after death should not go on the decedent's final 1040 tax return as was reported by the OP. The interest either belongs to the estate or to a beneficiary that has the rights to the income. In addition, if the distribution took place in Dec., then the interest was going to wind up on the beneficiary's 2010 tax return one way or the other.

Reply to
Alan

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