The following post spanned a couple of months and highlights the importance of appropriate estate planning post mortem. If you have been asked to act as an executor or estate administrator, you should be aware that you may be presented with complex income tax situations. You should seek professional help when ever possible to avoid adverse consequences.
In this case, the value of the securities in a brokerage account held by the deceased dropped in value after death. The executor sold the securities at a significant loss and unfortunately missed a potentially helpful tax planning opportunity.
Question: I understand that capital losses within an estate are transferable to beneficiaries of that estate. In my case, my mother who died in 2008 had capital loses. As a beneficiary of her estate, can I apply my portion of those losses to my 2008 income tax return to offset any capital gains I have?
If a deceased taxpayer had unused capital losses at the time of death and (or) losses realized from the deemed disposition at death, these capital losses may be used to offset capital gains from the current year and the year prior to death. If any excess losses remain, these may then be applied to any income of the year of death and the year immediately preceding the death. Any excess capital losses that still remain after application to those two years cannot be used to reduce income from other tax years nor be transferred to the beneficiaries.
If the deceased has a surviving spouse, the property can be rolled over tax deferred to the surviving spouse. If excess losses still remain, the it may be advisable to realize the gains before transferring to the surviving spouse in order to use the losses.
Following death and while the estate is being settled, the property of the deceased is treated as a trust for tax purposes. The property is deemed to have been acquired at its fair market value at the time if death and any gains or losses on subsequent disposition are taxable in the trust (or in the hands of the beneficiaries). Losses incurred by this trust may be carried back to the deceased’s’ income in the year of death only. Losses that have been realized (that is the property was sold) cannot be “transferred” to a beneficiary of a trust since losses inside the trust must be used gains (applied back three years or forward until the disposition of the trust to the capital beneficiaries).
However, if the estate transfers the property with “accrued losses” (that is the asset is still owned by the estate and has not been sold) to the beneficiaries, then the transfer is at the value as at the date of death. The beneficiary may then sell the property directly and realize and gains or losses directly. Be aware that this only applies if the asset has not been sold by the estate.
Losses and estate are very complicated matters. Anyone administering an estate where there were losses carried forward, losses realized on death, or losses realized or accrued following death should seek professional advice.
Thank you for your detailed reply. In looking for clarity, I do notice a statement which I think directly applies to my case, and I would appreciate your reaction to my interpretation. Understand we are interested in capital losses post death date. Your second to last paragraph below contains the following statement….
“”However, if the estate transfers the property with “accrued losses”
to the beneficiaries, then the transfer is at the value as at the date of death and the losses ca be realized directly.””
In my case the death of my mother was July, 2008. I interpret that the non-registered investment assets which had a total value at date of death being higher than today’s value result in a current capital loss which is the “accrued loss” referred to in your statement. I further interpret “can be directly realized” to infer that the accrued capital losses can be applied against capital gains that a beneficiary of these assets may have from other sources.
Please let me know if the above interpretations are correct, and if so what are the time limitations to apply (realize) these losses?
I’ll give you a scenario that should help aid you understanding.
A taxpayer dies owning shares of XYZ with a market value of $10,000 and a cost of $9,000. Six months later the estate still holds the shares of XYZ and is ready to distribute the shares to the beneficiaries. However, the value of the shares is now only $7,500.
Assuming there were no other gains or losses, here are the consequences:
1. As of the date of death, the deceased has a deemed sale of the shares for $10,000 and must report a capital gain of $1,000 of which $500 is taxable on their final “terminal” tax return.
2. Immediately after death, the estate of the deceased is deemed to have acquired the shares of XYZ at a cost of $10,000.
3. Six months following the death the shares of XYZ show a loss of $2,500. The executor may either sell the shares and apply this accrued loss to the $1,000 gain on the terminal return OR the executor may distribute the shares of XYZ to the beneficiaries.
If the shares are distributed to the beneficiaries, they will have been deemed to have acquired the shares at a cost of $10,000 and can then sell them for a loss which they can apply to their own gains in the current year and prior three years or carry forward indefinitely.
In the above scenario, if the executor sold the shares, then no loss is available to be transferred to the beneficiaries.
I am back with another question. Your below example is very clear, however instructions given to the financial institution handling the investments for the deceased were not followed. I am a co-executor for the estate, and have no personal relationship with the financial institution that held the shares. Following your example the following transpired…
There are 4 beneficiaries, each receiving 25% of the shares. There is the valuation date July 12, 2008 (date of death) and the settlement date December 22, 2008 and I have a statement for each of those dates.
A total capital loss of about $40,000 occurred which I can document. My 25% of the shares were sold by the financial institution handling the investments for the deceased and they then issued a cheque to me for that amount. Your summary below indicates that the shares were to have been transferred to me, and that upon receipt and subsequent sale by me, I could then claim the associated capital loss.
My question then is, considering that I can document the total portfolio capital loss, and that I can document the distribution to the 4 beneficiaries, can I then take this information and apply it to my 2008 tax return to register the approximately $10,000 capital loss associated with my 25% of the shares, and apply this loss against a capital gain I have in 2008? I prepare my own tax return using TurboTax .
In cases like this it’s important to isolate the relevant facts. From my read of the attached, here is what I have extracted as the relevant facts:
- A family member deceased July 12, 2008 – The assets of the deceased were deemed sold right before death and the same assets were acquired by their estate immediately following death.
- Since July 12, 2008 some of the assets in the estate lost significant value.
- The assets in question were sold at a loss inside the estate.
- The sale of the assets in question settled December 22, 2008.
- The loss occurred within one year of death.
As a result of these facts, the following consequences have occurred:
- The estate has realized a capital loss.
- Capital losses cannot, under any circumstances or conditions be allocated to a beneficiary of an estate, or trust.
- There are no exceptions available to the rule outline above.
- The loss may be used first against any capital gains in the year of death and since the loss was incurred within one year of death the executor can use them against capital gains realized in the hands of the deceased in the final tax return.
In this case, there is no opportunity for the beneficiaries to use the loss. It is only available to the deceased and their estate but only if realized within a year.
Now you mentioned that he your instructions were not followed by the financial institution but did not elaborate on those facts. If the financial institution sold the securities without your permission or authorization, then you may have legal recourse. Similarly, if the institution did not act in a timely manner to execute your trade instructions or made a mistake in following your instructions you again may have legal recourse. In either case you should speak with a lawyer.