How to treat inherited assets from a relative that died years ago.

[Unwired17]

My younger brother and I were determined to be the sole heirs of a stock account that had gone dormant. My distant relative died in 2005 but being a dividend reinvestment account the dividends continued to purchase stock after the relative's death in 2005. From what I understand the basis will be the date of death. But what about the stock purchased by dividends deposited to the reinvestment account after 2005 until 2022? Should the basis of those shares be based on the purchase price of the actual date?

Secondly to get this settled we had to pay a commission to a company to facilitate the transaction and some legal fees to establish us as the sole heirs. Where and how are these expenses accounted for?

Thanks for your help to a very confusing situation.

[maglib]

@Unwired17 

So sorry for your loss.

Suppose a family member bought $10,000 worth of stock 50 years ago and you inherit it. When they died the stock was worth $50,000 and since then has appreciated further and is now worth $65,000.

Under current tax law your cost basis on these inherited shares would have "stepped up" from $10,000 to $50,000 because that was their fair market value on the date the person died.

Now the dividends were earned post death.  The estate should have received a  separate Form 1099 should show the interest and dividends earned after the date of the decedent’s death and paid to the estate
or other recipient that must include those amounts on its return.  The dividend income is reported on a tax return of the estate but no tax is paid by the estate on them. A deduction is permitted on the estate’s tax return for distributions to beneficiaries. This includes completed distributions as well as those required but actually paid in a future year. The estate is therefore not taxed on dividends that it distributes to beneficiaries. Instead, the beneficiaries report their respective shares of distributed dividends.

The decedent received amounts as a nominee, the estate then  should have given the beneficiaries /the actual owner a Form 1099, unless the owner is the decedent's spouse.  you should have reported the dividend income on your own return.

Was a final estate tax return ever prepared?

So only date of death was cost basis,  the dividend reinvested shares if you never reported the income their cost basis is 0 or what income you reported on them.

The costs of the final tax return and estate dealings should be born by the estate.  If you incurred expenses managing the estate, you can deduct those on the estate's tax return. These might include costs like attorney or accountant fees or the cost to use a service. The estate can also deduct any executor fees it paid you for the services you provided as personal representative of the estate.

I hope this was helpful. 

[Opus 17]

It sounds like taxes were never paid on the reinvested dividends. That means they are not part of the basis, so the only basis is the fair market value of the account on the date of the previous owners death.

Your expenses would normally be considered a miscellaneous, itemized, deduction subject to the 2% rule, but that deduction was eliminated for tax year 2018 through 2025 by the 2017 tax reform law.   While the expenses could possibly be assigned to the estate, there could be practical and legal difficulties doing that.  Additionally, since you and your brothers seem to be the only heirs, if you re-opened the estate and charged the expenses of estate management to the estate, that would simply reduce the amount of net proceeds you received.  So I think it comes out as a wash, unless there were other heirs. And if there were other heirs at the time of your relative’s death in 2005, reopening the estate would alert them to the missing account and they could make a claim that might be superior to yours.  

The good news is that you can report the value of the account as a long-term capital gain, rather than as ordinary income, and capital gains have a lower tax rate.

[Unwired17]

Thanks for your response. There was never an estate tax return filed at the time of his death since we were not aware he died, and we were the only heirs. There were no other relatives alive at the date of death. The dividend income was not substantial, but it did purchase stocks over a long time. I do have the records of when the dividends were issued and how many shares were purchased when and at what price.

Not sure I was clear. This account was going to escheatment. That is what triggered the firm to contact my brother and me. So we, not the estate (since there never was a will or probate) incurred the expense as well as legal fees that established us through court order after investigation that we were the only heirs.