Inherited ESPP and RSUs as beneficiary sold via liquidation

[Cub3]

Hello,

I'm helping my mother fill out her taxes. She was the beneficiary of my father's investment account, and ownership was transferred to her (with a new account created by the brokerage) after his passing years ago. He had ESPPs and RSUs from a company he worked for, and it had liquidated this past year, so all stocks were sold without my mother taking any action. The brokerage has not provided any supplemental information.

From this thread, I'm inclined to have her use the FMV of the date he passed as the actual cost basis, but I'm not sure considering she was the beneficiary of the account and they had always filed taxes jointly.

Not sure if it helps, but given the date of his passing was more than 2 years ago, TurboTax has recommended that she file as single rather than as surviving spouse.

Many thanks for helping us in this stressful time!

[ReneV4]

Yes. She should file as single since it has now been more than two years after the year of death and also requires her to have a dependent child.

In Common Law States (non-community property), the IRS treats a joint account as being owned 50/50 by each spouse. Therefore, your father's half was stepped up to the Fair Market Value (FMV) on his date of death, but her half keeps the original cost basis (what was actually paid for the stocks).

To input this in TurboTax, do the following:

1. Enter the Form 1099-B exactly as it is writtent, by going to Federal; Wages & Income; Investment Income, Stocks, Cryptocurrency, Mutual Funds, Other
2. On the screen that asks "Do any of these less common situations apply?", check the box for "I need to adjust my cost basis"
3. TurboTax will then ask for the Corrected Basis. Enter the amount you calculated using the 50/50 rule above
4. For the "Inherited" half, TurboTax often suggests typing "Inherited" as the date, which automatically grants Long-Term Capital Gains treatment, regardless of how long she actually held them

[Cub3]

@ReneV4 Thank you so much for your prompt response! To clarify, the investment account was solely owned by my father, but ownership was transferred to my mother upon his passing as she was the beneficiary. Since they were married, their taxes were always filed jointly. Do I need to still apply the 50/50 rule?

[ReneV4]

Thank you for the clarification. Since the account was solely owned by your father, you would not use the 50/50 Rule. 

Your mother is entitled to a 100% step-up basis (entire asset basis at FMV on date of his death). 

The 50/50 Rule would apply to jointly owned accounts, not to an account that was passed to her as an inheritance. 

This applies even if they filed a joint return.

[Cub3]

Thank you, @ReneV4 ! I'm very glad to hear that, and I'm relieved that we won't have to hunt for old W-2s and additional information to determine the actual cost basis as though it were my father filing.

Would step-up basis also apply to all normal stocks my father solely owned, not just ESPPs and RSUs?

[ThomasM125]

Yes, you would get a stepped up basis for the stocks as well.

[Cub3]

Thanks @ThomasM125 ! As I was looking for the FMV of the day he passed, I realized it was on a weekend, and the Friday before was a holiday. Would I calculate the average of the high and low of the Thursday before (since that was the last market opening day), the average of the high and low of the Monday after (next market opening day), then take the average of the two?

[ThomasM125]

Yes, that would be a reasonable solution under the circumstances.