What are tax consequences of transferring stocks to the deceased’s estate vs. heirs?
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UPDATED: Jul 16, 2021
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A decedent’s estate plan or will determines if stock transfers to the estate or directly to the the decedent’s beneficiaries. If the stocks are transferred to the estate, then dividend income and gain or loss on the sale of the stocks is income or loss of the estate for income tax purposes (An estate with income files an income tax return). If the stock is transferred to the beneficiaries, the income or loss from the stock is income or loss of the beneficiaries for income tax purposes.
This could have little tax consequence or significant tax consequence, depending on the amount of long term gain, short term gain and dividends. The estate or the beneficiary could have a higher marginal tax bracket, and therefore one or the other could pay a greater level of tax on the income.
In most cases, an estate would have a higher marginal tax rate than a beneficiary, unless the income can be passed to the beneficiary via a Schedule K-1. This is an example of something that should be decided with careful estate planning, with the help of a tax professional or an attorney who specializes in estate planning.