Are NQSOs eligible for a basis adjustment after a death?

September 26, 2011

Date:   Fri, 30 Jul 2010
From:   Merrick

Mike,

Are non-qualified stock options eligible for a basis adjustment after a death? Is the “built-in” income for the options subject to both estate tax and income tax?

Any feedback or help here would be greatly appreciated.

Answer

Date:   13 Aug 2010

Hello Merrick,

Yes. Non-qualified stock options are reported on the decedent’s estate tax return at the fair market value of the option stock less the option price. (Revenue ruling 53-196.) IRS guidance for gifts of non-qualified stock options indicates that other valuation methods, such as the Black-Scholes model, may be appropriate. (Revenue Procedure 98-34.)

There is no basis adjustment for the amount reported on the decedent’s estate tax return because that amount is considered income with respect of a decedent. (IRC Section 691(c).)

Since the income is taxed twice, Congress enacted an imperfect offset by allowing a tax deduction for estate tax (and generation skipping tax) attributable to accrued income. (IRC Section 691(c)(3).)

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report,“Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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