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ras569
New Member

1.Do my heirs take my Master Limited Partnerships [ETP] held in regular accounts with a stepped up basis without the need to repay deferred distributions upon my death?

 
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GeoffreyG
New Member

1.Do my heirs take my Master Limited Partnerships [ETP] held in regular accounts with a stepped up basis without the need to repay deferred distributions upon my death?

Basically, yes.  Please allow me a moment to explain.

As a tax professional, I happen to know the answer to this question because I had an experience with a client a few years ago, who passed away owning several MLP (Master Limited Partnership) investments.  They were held in a regular, otherwise taxable, brokerage account.  The owner had owned most of them for over a decade, and several of the MLPs were highly appreciated in per unit share price, as well as having a much lowered tax basis (because of all the cash distributions made by the MLPs during the time that he'd held them).

When this investor passed away, here's essentially what happened and what I learned.

1) The MLP shares are valued at their actual market price on the date-of-death for estate tax calculation purposes.

2) Whatever Will, Living Trust, or other testamentary instrument that may exist comes into force to direct the estate to distribute the MLP shares and other assets to the inheritor(s).  If the brokerage account has a surviving joint owner, then the account will go to them.  Absent any testamentary directives, the intestacy laws of the state of the deceased will direct who inherits what.

3) The broker, or a representative of the financial institution that is the custodian of the MLP shares (or alternatively the estate's lawyer) will contact the tax office of each MLP separately, and inform them of the original MLP unit owner's death.  The name and Social Security Number of the new owner (inheritor) will also be provided to the MLP.  From that point forward, it will be as though the new owner had simply bought the shares on the open market.  All of the basis and other attributes will be "stepped up" to reflect market value as of the deceased's date of death (DOD).  There is but one exception to this.  Since all inherited property must be assigned a long-term holding period under federal tax law, if the MLP shares are subsequently sold by the new owner within one-year after the DOD, the capital gains (if any) would be considered long-term and not short-term.

Essentially, then, that's how the process works.  And no, the heirs do not have to repay any of the distributions received by the original owners; while they still get to enjoy the step-up in basis.  For those reasons, in the professional tax and estate planning communities, MLPs are thought of as a useful estate planning tool.

Please note that I speak very generally here, as not every professional agrees on this last point; nor do I in any way intend to imply that this answer constitutes specific investment advice, as it does not.  I mean only to call attention to the beneficial intergenerational tax-planning attributes of MLPs, and not recommend any particular investment.

Thank you for asking this important question.

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1 Reply
GeoffreyG
New Member

1.Do my heirs take my Master Limited Partnerships [ETP] held in regular accounts with a stepped up basis without the need to repay deferred distributions upon my death?

Basically, yes.  Please allow me a moment to explain.

As a tax professional, I happen to know the answer to this question because I had an experience with a client a few years ago, who passed away owning several MLP (Master Limited Partnership) investments.  They were held in a regular, otherwise taxable, brokerage account.  The owner had owned most of them for over a decade, and several of the MLPs were highly appreciated in per unit share price, as well as having a much lowered tax basis (because of all the cash distributions made by the MLPs during the time that he'd held them).

When this investor passed away, here's essentially what happened and what I learned.

1) The MLP shares are valued at their actual market price on the date-of-death for estate tax calculation purposes.

2) Whatever Will, Living Trust, or other testamentary instrument that may exist comes into force to direct the estate to distribute the MLP shares and other assets to the inheritor(s).  If the brokerage account has a surviving joint owner, then the account will go to them.  Absent any testamentary directives, the intestacy laws of the state of the deceased will direct who inherits what.

3) The broker, or a representative of the financial institution that is the custodian of the MLP shares (or alternatively the estate's lawyer) will contact the tax office of each MLP separately, and inform them of the original MLP unit owner's death.  The name and Social Security Number of the new owner (inheritor) will also be provided to the MLP.  From that point forward, it will be as though the new owner had simply bought the shares on the open market.  All of the basis and other attributes will be "stepped up" to reflect market value as of the deceased's date of death (DOD).  There is but one exception to this.  Since all inherited property must be assigned a long-term holding period under federal tax law, if the MLP shares are subsequently sold by the new owner within one-year after the DOD, the capital gains (if any) would be considered long-term and not short-term.

Essentially, then, that's how the process works.  And no, the heirs do not have to repay any of the distributions received by the original owners; while they still get to enjoy the step-up in basis.  For those reasons, in the professional tax and estate planning communities, MLPs are thought of as a useful estate planning tool.

Please note that I speak very generally here, as not every professional agrees on this last point; nor do I in any way intend to imply that this answer constitutes specific investment advice, as it does not.  I mean only to call attention to the beneficial intergenerational tax-planning attributes of MLPs, and not recommend any particular investment.

Thank you for asking this important question.

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