1099-misc on vested options

[wireless200]

Decedent passed in 2020.  Probate was completed in 2021 and stock options vested in 2021 as well as part of the probate process.  A 1099-misc was received to the deceased's estate.  Ultimately stock (not sold) passed to spouse in their original vested shares form.  That is, they vested and were awarded as shares in the estate account but were not sold.  Subsequently they were moved to the spouse's brokerage account

Will the 1099-misc proceeds be placed in the estate's 1041?  And if so taxed at what rate?

[GeorgeM777]

You indicated that the shares were not sold, but "passed to [the surviving] spouse."  If the shares were not sold, then what do the proceeds on the 1099-Misc represent?  What amounts, if any, are in the boxes on the 1099-Misc?  Because you are posting an estate question that relates to the administration of the estate, your question may be outside the limits of the advice we can offer.  However, provide whatever non personal identifiable information you can, and we will respond accordingly.  

[wireless200]

Hi George, good morning, this is purely a tax question, the estate admin is complete.

When decedent passed she had company stock options.  They sat there until 2021 when probate lawyer requested that the options be converted to shares and then moved to beneficiary spouse's account.   This occurred in 2021.   

A 1099-misc for 2021 was just received with line 3 (other income) filled in with the value of the shares at the spouse's time of passing.

Trying to determine if this amount should be filled in on Line 8 of the 1041 and then taxed (and at what rate or what the rate schedule is). 

Basically wondering overall is this a taxable event since the shares were never actually sold but instead only converted to actual shares and moved to spouse's brokerage.  Other existing (non stock options i.e., regular investments) shares in other brokerage accounts came over to the spouse but since they are not sold they are just sitting there at a certain cost basis with unrealized (as yet untaxed) gains.

[GeorgeM777 · Accepted solution]

It appears that the option was exercised, and accordingly shares were purchased, and the shares subsequently transferred to the beneficiary.  The exercise of the option is a transaction, and options to purchase stock are capital assets.  As per IRS guidance, use Form 8949, Sales and Other Dispositions of Capital Assets, to report most sales and exchanges of capital assets.  Thus, reporting the income from box 3, 1099-Misc, on line 8, Form 1041, does not appear to be the correct way to treat this income. 

If the option had a value at the time it was exercised, and that value resulted in a capital gain/loss for the estate, then the estate would likely need to report that gain/loss on Schedule D to the Form 1041. 

Generally, a beneficiary that inherits stock (and that appears to be the case here) receives the stock with a "stepped up basis," in that the basis is the value of the stock as of the date of death of the decedent.  

The basis used to figure gain or loss for property the estate receives from the decedent usually is its fair market value at the date of death.   Thus, the fact that the 1099-Misc reflects the value of the options as of the date of the decedent is consistent with IRS guidance.  

Here is a link to the IRS Publication 559 that addresses, among other things, how Executors/Administrators should complete federal income tax returns for estates.  

IRS Publication 559 for Survivors, Executors, and Administrators