Possible Sale of NUA Stock
The only transactions involving my NUA shares (received in LSD taken in 2000) have been the regular reinvestment of all dividends on such shares back into additional stock issued by the same corporation. 3 questions:
(1) Can I divide the total NUA into several unequal amounts, and then sell the associated number of NUA shares relating to each such amount in different calendar years?
(2) Does the total NUA amount have to be sold before any non-NUA shares in the same corporation are sold?
(3) If I were to die unexpectedly without a complete explanation in my papers re the NUA, and further, if my heirs — being totally unaware of the NUA situation — were simply to divide among themselves the total NUA and non-NUA shares and then also step up the basis of all of said shares to the price at my date of death, how would this situation be detected in my final income and estate tax returns? NO intention here to evade taxes on the NUA portion — just trying to develop a writeup that would assist final disposition!
Thanks very much in advance for your help.
Permalink Submitted by Alan Spross on Mon, 2008-12-08 22:07
1) I am not sure I understand what you are asking here, but each share that came out of the plan has an established cost basis per share on which taxes were paid. The NUA per share is the excess in price per share between the cost basis and the FMV upon distribution. If the stock gains more than the original FMV, then that is just ST or LT (after one year) gain and not NUA. Shares purchased by reinvested dividends have no NUA component whatsoever since they were purchased after the shares had left the plan.
2) No. But since the reinvested shares are in the same brokerage account, they could be sold by identifying the specific shares you want sold and getting written broker confirmation. For example, if you wanted to sell the shares purchased by dividend reinvestment from 2002 to 2005, you could specify to the broker to sell those shares without first selling any NUA shares. Each reinvestment would have a different cost basis, and you would have to add them up.
3) THis is complex and you should document the file in some detail so that your heir or their advisors can figure out the cost basis of the shares. The NUA itself is IRD and does NOT get a step up in basis, but further gains above the FMV when the plan distributed the shares DO get a basis adjustment. The shares from dividend reinvestment get a full basis adjustment because there is no NUA component to them. Note that NUA can be lost and recovered by market fluctuation.
Example: Cost basis 10.00 per share, NUA 40.00 at distribution and FMV is 50.00. If that stock has dropped to 25.00 when you pass, there is only 15.00 of NUA that is inherited and the heir’s basis is 10.00. If the shares then rise, the NUA is reinstated up to 40.00 of NUA.
I would think that the IRS retains your tax records along with the 1099R showing NUA in the year of the LSD. Whether they have a meaningful suspense on this to prevent a beneficiary from taking a full step up of the NUA is anyone’s guess.
The full FMV of the shares are in your gross estate in the same manner as other IRD assets such as an IRA.
Permalink Submitted by charles lore on Tue, 2008-12-09 01:58
Alan I just want to clear on this. Dad’s basis is 10 so nua is 40 since stock comes out of plan at 50. Stock goes to 25 and dad dies. At dod ird is 15 . That is clear.
Lets say son does not sell and it goes back to 50. The ird is now 40?
Now lets say it goes up to 75. How is the last 25 treated if son sells 11 months after dod? How about 13 months after dod?
Permalink Submitted by Alan Spross on Tue, 2008-12-09 02:40
Chuck, glad you raised this question. No, the IRD is not 40 as I incorrectly stated.
Upon rethinking that example of the employee passing with shares at 25, the NUA in excess of 15 just disappears since the employee did not have a right to receive value that was not there at death, so only the 15 is IRD. Only 25 would be in the gross estate. The beneficiary of those shares inherits the 15 IRD and has a basis of 10.
Now, in the beneficiary’s control the shares rise to 75 and beneficiary sells at 75. Beneficiary would have a cost basis of 10, a LT gain on the IRD of 15, and a ST gain on the remaining 50 because the shares were not held over 12 months prior to sale. The step up the beneficiary gets is only on the non IRD 10 that was inherited.
The NUA does come and go as the shares fluctuate while the employee lives, but the death would stop the clock on NUA fluctuation and it would be frozen at the DOD value less the cost basis. This same limiting factors would apply if another successor beneficiary succeded the first one and the FMV of the shares on the first beneficiary’s death would affect the next beneficiary.
Does this make more sense?
Permalink Submitted by charles lore on Tue, 2008-12-09 03:32
makes sense but lets take this a step further. Lets say dad dies with stock still in plan. For simplicity stock was only asset. Dad dies with stock at 25 and by the time son does the lsd and takes out stock it is at 75.
Here can we still say the nua clock stopped at death? I would lean toward thinking that the nua is 65 ??
Permalink Submitted by Alan Spross on Tue, 2008-12-09 04:10
I agree. NUA can increase if the shares are still in the plan, while it is capped once the shares are distributed.
In this example, when Dad dies with the plan intact, a non spouse plan beneficiary would have to begin RMDs by the end of the following year, and that would mean that the LSD would also have to be taken in that year. This would limit the time that the NUA would be able to grow, but not a real problem for the beneficiary, since he only needs to wait one year outside the plan for the distributed shares to earn the same LTCG rate on further gains.