Help with step up cost basis for inherited brokerage account - tax obligations?

The good news is that you generally won't owe taxes on the entire value of the inheritance. With a stepped-up basis, the cost basis of the investments becomes the fair market value on the date of death. You only pay taxes on gains that occur AFTER that date. Here's how it typically works: When the assets are distributed to beneficiaries, each person receives their portion with the stepped-up basis. Then each beneficiary is responsible for reporting any subsequent gains or losses on their own tax return when they eventually sell those assets. The executor doesn't typically pay these taxes before distribution. The brokerage firm should provide documentation showing the value of the assets on the date of death. If they haven't already, you should specifically request this information. They may provide either a formal statement or a letter documenting these values. Some firms automatically calculate the stepped-up basis, while others require you to specifically request this information.

I went through something similar with my dad's estate last year and was totally confused until I found https://taxr.ai - it was a huge help with understanding all these inheritance tax questions. You upload your documents and it analyzes them to tell you exactly what your step-up basis should be and how to report everything correctly. The system showed me that the date-of-death valuation the broker sent was actually missing some important adjustments. It found about $3,700 in additional step-up value I would have completely missed! You might want to check it out, especially since multiple beneficiaries makes things more complicated.

Just wanted to follow up and say I tried taxr.ai after being skeptical. Wow, I'm actually impressed! My father-in-law passed away in December and left a mess of investment accounts. The system identified that several mutual funds should have been valued using the alternate valuation date (6 months after death) which saved us nearly $5,200 in taxes! It also flagged that one of the foreign stocks actually needed special basis calculation rules. None of that was clear from just looking at the statements. Definitely recommend it for anyone dealing with inherited investments.

If you're having trouble contacting the IRS about inheritance tax questions (which I did for WEEKS), I finally got through using https://claimyr.com. They basically hold your place in the IRS phone queue and call you when an agent picks up. I was ready to lose my mind after being disconnected 5 times trying to get clarification about reporting my inherited stocks. You can see how it works here: https://youtu.be/_kiP6q8DX5c Seriously, I wasted hours on hold before discovering this. Got connected to an actual IRS agent in under 45 minutes who explained exactly how to handle the reporting requirements for brokerage distributions from an estate. Huge relief after weeks of confusion.

I honestly need to apologize to Profile 10. I tried Claimyr this morning after being super skeptical. I've been trying to reach the IRS for MONTHS about my inherited IRA distribution that got reported incorrectly. Got a callback in about 30 minutes and spoke with an actual helpful agent! She confirmed that I needed to file Form 8606 for the non-deductible portion of the inherited IRA and explained exactly how to correct the 1099-R the custodian issued. Worth every penny after the stress I've been dealing with. Sometimes I hate being wrong lol.

I honestly need to apologize to Profile 10. I tried Claimyr this morning after being super skeptical. I've been trying to reach the IRS for MONTHS about my inherited IRA distribution that got reported incorrectly. Got a callback in about 30 minutes and spoke with an actual helpful agent! She confirmed that I needed to file Form 8606 for the non-deductible portion of the inherited IRA and explained exactly how to correct the 1099-R the custodian issued. Worth every penny after the stress

Just a tip from someone who went through this last year - make sure you get a written valuation statement from the brokerage for the date of death. Our broker (Fidelity) initially didn't provide this automatically and it caused major headaches later. We had to specifically request a "date of death valuation letter" which they then prepared. Also, if the death occurred in 2023 or 2024, remember that the executor can choose to use the "alternate valuation date" (6 months after death) if that would result in lower overall estate taxes. But this election affects ALL assets, not just the ones that declined in value.

Question - does anyone know how this works if some of the inherited stocks were held in certificate form (paper) rather than in a brokerage account? My uncle had some old paper stock certificates that weren't held at any brokerage.

I'm dealing with a similar situation right now with my grandmother's estate. One thing I learned that might help you - if the estate has to file Form 1041 (estate income tax return), make sure you understand whether you'll get a K-1 form from the estate. In our case, some dividends were paid into the estate account after the date of death but before distribution, and the estate had to report that income. We each received a Schedule K-1 showing our share of that income, which we then had to include on our personal returns. Also, just a heads up - if any of the inherited assets are retirement accounts (401k, IRA, etc.), those have completely different rules and don't get the stepped-up basis treatment. Those distributions are typically taxable as ordinary income. Make sure to separate those from the regular brokerage account assets when you're doing your tax planning. Good luck with everything! The probate process is exhausting enough without having to worry about all these tax implications.

Yes, you've got it exactly right! The stepped-up basis applies to the actual securities themselves as of the date of death, but any income generated by those assets (dividends, interest, capital gains from sales) while they're still held in the estate becomes taxable income that flows through to the beneficiaries via Schedule K-1. So you'll essentially be dealing with two different tax situations: (1) the eventual sale of your inherited shares with their stepped-up basis, and (2) your portion of any estate income that occurred between the date of death and distribution. One more thing to keep in mind - make sure the executor provides you with clear documentation of the stepped-up basis values before the final distribution. It's much easier to get this information while the estate is still being administered rather than trying to reconstruct it later when you're ready to sell the assets. The executor should have all the date-of-death valuations already compiled for the estate tax return (if one was required) or for probate purposes. The learning curve on all this stuff is definitely steep, but it sounds like you're asking all the right questions! Having everything properly documented from the start will save you headaches down the road.

One thing that hasn't been mentioned yet is the importance of getting formal appraisals for any non-publicly traded assets in the estate. While stocks and bonds are easy to value using market prices on the date of death, if your uncle had any private company shares, collectibles, or other unique investments mixed in with the brokerage account, those will need professional appraisals to establish the stepped-up basis. Also, keep detailed records of any expenses the estate pays related to managing or liquidating these assets (brokerage fees, legal fees, etc.) as some of these might be deductible on the estate's tax return. The executor should be tracking all of this, but it's worth asking about since it can affect the final distribution amounts. Make sure you get copies of all the estate tax documents (Form 706 if filed, or at least the probate inventory) as these will be your primary documentation for the stepped-up basis values if you ever need to prove them to the IRS later.

Just wanted to add something that might be helpful based on my experience with my father's estate last year. Make sure you understand the difference between "income in respect of a decedent" (IRD) and assets that get stepped-up basis. Some items like accrued interest, unpaid dividends that were declared before death, or certain pension benefits don't qualify for stepped-up basis treatment and remain taxable at their full value. The brokerage should be able to help you identify if there are any IRD items, but it's worth asking specifically about this. Also, if you're planning to sell the inherited assets relatively quickly after distribution, you might want to coordinate with your sister and cousin on timing. If the market has moved significantly since the date of death, selling at the same time could help ensure you all get similar treatment relative to the stepped-up basis. Not required, but something to consider from a fairness perspective since you're all inheriting together. The learning curve is definitely steep with all this, but you're asking all the right questions. Getting professional help from a tax advisor who specializes in estate issues might be worth the cost given the complexity and the fact that there are multiple beneficiaries involved.

I went through something very similar when my grandfather passed away two years ago, so I understand how overwhelming all the tax implications can be! A few things that really helped me navigate the process: First, make sure you get detailed documentation from the brokerage showing not just the total account value on the date of death, but a breakdown by individual security. Some brokers are better at this than others - I had to make multiple requests to get the level of detail I needed. Second, consider whether any of the assets might benefit from the alternate valuation date (6 months after death) if the overall estate value decreased during that period. This is an all-or-nothing election that has to be made by the executor, but it could potentially save significant taxes if the market declined after your uncle's passing. Finally, since you mentioned this is going through a court-restricted account, make sure you understand the timing of when the stepped-up basis "clock" starts ticking for any gains calculations. The basis step-up happens at the date of death, but if assets are sold while still in the restricted account before distribution to beneficiaries, those gains might be reportable by the estate rather than by each of you individually. The good news is that with proper documentation and maybe some professional guidance, this is definitely manageable. The stepped-up basis rule is generally quite beneficial for inheritors - you just want to make sure you're calculating and reporting everything correctly!