Hello!
I currently work with my father who is a stamp dealer - when he passes, the plan is for him to leave his inventory to me and for me to carry on. There are literally hundreds of stock books with millions of individual stamps all bought at different times over the last 50 years. How do I account for their value going forward and how do I handle the selling, taxes etc. on my own tax returns?
You should consult with a local estate planning attorney.
See https://www.avvo.com/estate-planning-lawyer.html
The value of the business is almost certainly worth more than just the inventory and will have to be appraised when your father passes (for the fair market value on the date of death).
When your father passes, you will get a step-up in basis for the assets that he leaves you. That means the value of the assets is their Fair Market Value (FMV) on the date of death.
As for the details of how you will operate the business, you should first consider how it is being operated now. Since this is a going concern, it may be best to continue it as it has been. The first step is to understand how things work now.
While your father is still alive, learn as much as you can about the business. Is it reported on Schedule C, or is it a business entity like a corporation? How is the bookkeeping handled? How are the taxes filed now? How is inventory tracked?
I sure you will have more questions as you learn more, please feel free to reach out with more questions.
Hmm. All good questions. I know he runs the business as a sole proprietor, and files using Schedule C. His inventory is not really tracked per se. I believe he estimates inventory value - except for purchases actually made in the business year - those he has accurate info on - the rest is estimated. I am assuming that if I continue it as is that I would use his last inventory valuation (estimate) as the starting point. Since technically the inventory I start with is not purchased by me...is the taxable amount of sales the entire amount or just the difference between the starting value and sale price?
I feel like I am staring into a black hole...:-)
@JKSteele wrote:
.....Since technically the inventory I start with is not purchased by me...is the taxable amount of sales the entire amount or just the difference between the starting value and sale price?
Is your father going to turn the business over to you (while he is still alive)?
If you will basically inherit the business (or otherwise receive it from your father when he passes), you will get a stepped up basis in the business as if the date of death. You will, of course, need to get the business appraised, which will include an appraisal of all assets (including the inventory).
@JKSteele wrote:I feel like I am staring into a black hole...:-)
That is precisely why you need to consult with an estate planning attorney.
Provided you will not receive any ownership or interest in the business, until after he passes, you'll get a step-up in basis as others have mentioned already. One thing that will be needed and probably required, is a professional appraisal and valuation of the business as soon as possible after his passing, and before any large transactions are executed after he passes. Most likely, the IRS would not agree with your dad's valuation, or your own valuation for that matter. Therefore, you need to plan on paying for an appraisal (which can be paid by the estate after his passing) as soon as possible once he's gone.
As others have mentioned, you really need to get with an estate planning attorney on this, *before* your dad is gone. If you're in a state that taxes personal income, or if dad is married and lives in a community property state, things can get very complicated, very fast if you wait until "after the fact". The complications are compounded even more if there is not a will in place too.
I am so thankful for everyone's swift response.
I do picture it getting complicated fairly quickly and will definitely seek professional help. Dad is married...we have talked and his wife has agreed to give over the inventory and dad is working on his will now. Getting the stock appraised will be the most challenging, but should be doable.
and in answer to another question, no I do not have any ownership in the biz until dad dies.
@Carl wrote:The complications are compounded even more if there is not a will in place too.
Complications can arise even with a will in place, particularly in community property states and common law states where state law allows a spouse to elect against a will.
A viable strategy needs to be put into practice well ahead of time (obviously with the help of local legal counsel).