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Stepped-up basis question for a deceased’s final return

My father passed away last year.  He had a grantor trust that converted to an irrevocable trust upon his death.  As his executor, I am both the successor trustee for this trust and the fiduciary responsible for filing his final individual return, with split-tax reporting for the year.

 

One complication that required me to seek an extension was a forced sale of some MLP units he owned that occurred shortly after his passing, but before the units could be transferred to a trust brokerage account.  (The partnership just bought out the units out of the blue).  He had owned these units for almost 40 years, and received a final K-1 for them under his own name and SSN that reflected his (considerably negative) individual adjusted basis.

 

My understanding is that because this K-1 was issued under his name, it will have to be reported on his individual return.  However, legally, these units became property of the trust upon his death, so I would think they should be entitled to a step-up in basis as inherited assets.  Moreover, the proceeds have since been moved into an account under the trust’s EIN.  Therefore, will it be possible to just go ahead and take the step-up in basis that the trust should be entitled to, even though the K-1 as issued doesn’t reflect that?  If not, should I request a new K-1 be issued in the name of the trust?  I don't know how long that will take, or if they'll even do it.

 

Using Turbotax Premier for the individual return and Turbotax Business for the trust return.

 

Thanks.

2 Best answer

Accepted Solutions

Stepped-up basis question for a deceased’s final return

I am sorry for your loss.

 

Yes, the units receive a step up in basis (to their fair market value on the date of death) since they were acquired from a decedent, per Section 1014.

View solution in original post

Stepped-up basis question for a deceased’s final return

@mlpinvestor here are my follow-up thoughts:

  • There are a lot of facts that really need a one on one discussion, but I will do my best based on a forum such as this.  You may want to consult with a tax professional and also see if you can find your Dad's prior year tax return.  This would help a tax professional in understanding what occurred in the past.
  • The first thing you should do is split the K-1 into two groups; your Dad's final 1040 for 10/12 and the irrevocable trust for 2/12.
  • Determine if you can, the timing of any distributions on the K-1 and use those for the applicable period; pre and post.
  • The vast majority of MLP K-1's reflect tax basis, so I am going to use that as an assumption.
  • Based on bullet #4, your Dad either took losses that he shouldn't have, due to either tax basis, at-risk limitations or MLP (PTP) loss limitations, or he has suspended losses.  This is really a key item.
  • If you cannot determine your Dad's basis, and there are losses flowing through the K-1, I would take a conservative position and not take any of the losses.  The negative basis tells me there is most likely no position to take the 2021 loss.
  • You then indicate that there was an unexpected repurchase of MLP units post death.  This purchase price would be a good indication of the FMV of the units; which will then allow you to determine the step-up value.
  • Since the units were repurchased post death, and would be a reasonable position to indicate FMV, I would say there is no gain or loss on the repurchase of units.  I would report the sale / repurchase using the repurchase price as the sales price and cost basis (step-up).
  • Based on the repurchase price you now have the value of the remaining units.  You haven't indicated whether you continue to hold this investment, so not sure if this is even applicable.  But this does have implications if you continue to hold units.
  • You indicate that the repurchase was reported under your Dad's SSN.  Since, based on the limited facts, you will take the position that there is no gain or loss, as noted in bullet #8, reporting this on your Dad's final return would avoid any matching issue.  While technically this should be reported on the irrevocable trust return, since there is no gain or loss, there is no tax consequence.  This could easily be explained should you be audited.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

View solution in original post

8 Replies

Stepped-up basis question for a deceased’s final return

I am sorry for your loss.

 

Yes, the units receive a step up in basis (to their fair market value on the date of death) since they were acquired from a decedent, per Section 1014.

Stepped-up basis question for a deceased’s final return

Also, you should not need to have a new K-1 issued, but since this is an MLP, I will page @Rick19744 to see if he has any further input.

Stepped-up basis question for a deceased’s final return

A few comments:

  • The biggest issue I see here is whether you know your tax basis in this investment; especially given how long you indicated this has been held.  Many MLP K-1's do indicate tax basis, but having your own tax basis schedule to confirm that figure is always best.
  • Next, hopefully you understand how many units are owned in order to determine the basis per unit; not sure if the buyback and final K-1 are the result of the same event.
  • MLP's are generally large partnerships and getting items updated can be tedious.  If the K-1 you received should be prorated, between your Dad's final tax return, and the trust return, then just make these adjustments.  I don't know if TT provides the ability to include a statement indicating the reason for any adjustment.  
  • I agree with @tagteam in that it isn't necessary to request a revised K-1; in fact I doubt the MLP will even do so.  [edit.  No question two K-1's would be best and technically correct, my experience with MLP's is it is doubtful they will accommodate the request]
  • I also agree that you get a step-up in basis as a result of the death of your father. Don't forget to factor that step-up into the determination of the gain or loss on the buyback by the MLP.
  • The facts indicate a "large negative adjusted basis".  
    • Is the final K-1 final period, or just a final to your Dad as a result of his passing and the trust will receive future K-1's?
    • Are there suspended losses?  I would assume so.  This could have implications on utilization as a result of the step-up.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

Stepped-up basis question for a deceased’s final return

sorry for your loss.

 

The death of a partner often brings unanticipated and unwelcome tax and accounting complications to the partnership, the partner’s estate and heirs, as well as the partner’s final income tax return. When a partner dies, the tax year of the partnership closes for that partner, requiring tax allocations and entries to the partnership’s books. 

Disposition of a partnership interest due to a partner’s death can involve basis elections to the successor partner’s interests, as well as questions as to how any suspended losses carried forward by the deceased partner must be treated for tax purposes

 

so I see 2 k-1s being required one through the date of his death reported on his 1040 and the other after reported on the 1041. this is also where the sale would be reported.  this requires notifying the partnership of change of ownership and requesting a 754 step-up (if the partnership does them) based on market value on the date he died.

 

the partnership should supply sales schedule to aid in reporting the sale. you probably have one with the original k-1.

 

Stepped-up basis question for a deceased’s final return

Thanks, everyone, for the sympathies, and for the help.  I appreciate it.

 

@tagteam @Rick19744 Honestly, I don’t really know the actual basis.  Dad never kept track of it, and I don’t think he bothered with suspended losses or carryforwards, either.  I think he just got talked into this investment by some guy he knew at work once upon a time.  It was a group of Pizza Hut restaurants.

 

I do have a negative number in the "partner’s capital account analysis" section of the K-1 that I assume is probably more or less the basis.  I was hoping I could ignore that and report it as the market value at the date of death, with the capital gain on the sale being the difference.

 

I understand the reasoning for having two K-1s issued, but the second one would only be for about two months.  For what it's worth, the sale also was recorded on his 1099 from Wells Fargo (where the units were held) as a non-covered sale with "N/A" listed in the cost basis and gain/loss columns.  This 1099 was issued under his personal SSN in the name of his grantor trust, with him as the deceased trustee.  I just don’t want any confusion to arise from reporting the sale differently on a new K-1.

 

Thanks again.

Stepped-up basis question for a deceased’s final return

@mlpinvestor here are my follow-up thoughts:

  • There are a lot of facts that really need a one on one discussion, but I will do my best based on a forum such as this.  You may want to consult with a tax professional and also see if you can find your Dad's prior year tax return.  This would help a tax professional in understanding what occurred in the past.
  • The first thing you should do is split the K-1 into two groups; your Dad's final 1040 for 10/12 and the irrevocable trust for 2/12.
  • Determine if you can, the timing of any distributions on the K-1 and use those for the applicable period; pre and post.
  • The vast majority of MLP K-1's reflect tax basis, so I am going to use that as an assumption.
  • Based on bullet #4, your Dad either took losses that he shouldn't have, due to either tax basis, at-risk limitations or MLP (PTP) loss limitations, or he has suspended losses.  This is really a key item.
  • If you cannot determine your Dad's basis, and there are losses flowing through the K-1, I would take a conservative position and not take any of the losses.  The negative basis tells me there is most likely no position to take the 2021 loss.
  • You then indicate that there was an unexpected repurchase of MLP units post death.  This purchase price would be a good indication of the FMV of the units; which will then allow you to determine the step-up value.
  • Since the units were repurchased post death, and would be a reasonable position to indicate FMV, I would say there is no gain or loss on the repurchase of units.  I would report the sale / repurchase using the repurchase price as the sales price and cost basis (step-up).
  • Based on the repurchase price you now have the value of the remaining units.  You haven't indicated whether you continue to hold this investment, so not sure if this is even applicable.  But this does have implications if you continue to hold units.
  • You indicate that the repurchase was reported under your Dad's SSN.  Since, based on the limited facts, you will take the position that there is no gain or loss, as noted in bullet #8, reporting this on your Dad's final return would avoid any matching issue.  While technically this should be reported on the irrevocable trust return, since there is no gain or loss, there is no tax consequence.  This could easily be explained should you be audited.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

Stepped-up basis question for a deceased’s final return

Thanks, @Rick19744 .  That's helpful.  I hadn't considered just reporting the buyout price as the FMV for cost basis purposes.  But that makes sense.  And yes, the entire investment got bought out, so no further K-1s.

Stepped-up basis question for a deceased’s final return

Welcome.

*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
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