Estate Valuation for NUA

Submitted by Richard Hopkins on Wed, 2016-06-15 21:54

Client retired at age 70 and has closed their employee 401k account. ESOP stock was transferred out as ‘NUA’ and remaining funds rolled over to an IRA. When client passes, it is understood that the beneficiary of the NUA will treat the NUA with the same ‘long term capital gains’ as the descendant would have done.

Question 1:Is the NUA stock ‘cost basis’ used as the asset value for decedents federal estate tax purposes ??
(It is reported that the beneficiary does not get the ‘stepped up value’ for NUA as with other assets. When the stock is liquidated by the beneficiary, the NUA will be taxed at long term capital gain rates.) Otherwise the beneficiary is effectively “double taxed” (Cap Gain in the NUA vs Current Market plus full estate tax on Market value.

Question 2: For New Jersey estate tax, would the same ‘cost basis’ be used ?



Submitted by Alan - IRA critic on Wed, 2016-06-15 23:44

NUA is considered to be IRD in the decedent’s estate. IRD is included (eg retirement plans) in the gross estate and subject to estate tax as explained in the following quote from an article on IRD. Double taxation for the beneficiary is addressed by the IRD deduction, at least partially. Cannot comment on any NJ exceptions:

IRD is also includable in a decedent’s gross estate for federal estate tax purposes as a property interest or right that passes at death. Unfortunately, IRD is potentially liable to double taxation, once for federal estate tax purposes and again to the recipient for federal income tax. To prevent or reduce this double taxation, the recipient is allowed to take a deduction for the amount of federal estate tax paid by the estate that was attributable to the inclusion of the IRD in the decedent’s gross estate.



Submitted by William Tuttle on Thu, 2016-06-16 03:33

One possible consideration is to cuurently sell the NUA stock and use the proceeds to diversify. This takes advantage of the NUA taxation at long term capital gains rates and resets the basis. This results in any future portfolio gains getting a step up in basis at death. This also has a side effect of reducing the portfolio balance that might be subject to estate tax. You could do this over a number of years for SS taxation, Medicare Part B/D premiums, and general income tax considerations. 



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