Discussion:NET UNREALIZED APPRECIATION (NUA) TAX QUESTIONS

NET UNREALIZED APPRECIATION (NUA) TAX QUESTIONS

Employee takes Lump-Sum Distribution of Company Stock, pays ordinary income tax on Original Basis and defers tax on NUA.

Employee dies still owning Company Stock which is included in his Taxable Estate at FMV at Date of Death.

Non-spousal Beneficiary #1 inherits stock with a basis decreased due to previously untaxed NUA.

When Beneficiary #1 sells inherited stock, he or she pays Capital Gains Tax on previously untaxed UNA.

Questions –

Is Beneficiary #1 “forced” to sell the stock during his or her lifetime?

Can he or she leave the stock to Beneficiary #2 in his or her will?

If he or she does not sell any of the stock, does he or she pay income or capital gains tax on the previously untaxed NUA at time of his or her death?

Does Beneficiary #2 receive a step-up in basis to the FMV of the stock on the Date of Death of Beneficiary #1?

Does the previously untaxed NUA carryover to Beneficiary #2 through a decreased basis or other means?

If Beneficiary #2 never sells the stock, does the previously untaxed NUA carryover to succeeding owners of the stock?

Is the sale of the stock the only triggering event for the taxation of the previously untaxed NUA?

If the stock is never sold and becomes worthless, is the previously untaxed NUA ever subject to tax (Capital Gain or Ordinary)?

Is the “future” Capital Gains Tax on the UNA left in the Employee’s estate considered a debt of the decedent and deductible on Schedule K or elsewhere on Employee’s Form 706?

Just spoke to associate regarding this. The NUA was generated from employee/employer match of purchased stock placed in a retirement plan. GE is big in this area, so I use them as an example. 1000 shares of GE were placed in the plan over time and let's say the basis was $5 a share, so original basis was $50,000. Employee is retiring from company 30 years later. GE Stock is $15 a share so the value is $150,00 <$50,000 basis plus $100,000 NUA>. Employee has the option of rolling this over into a IRA or to take a 100% lump sum distribution and pay ordinary income tax on the original basis value <$50,000>. The NUA would get taxed when he sold it <presumably at a lower capital gains tax vs the ordinary income if he rolled it over>.

I think the issue with the stepped up basis is the fact that it accrued within the pension plan. Let's say Employee dies a year later when the stock is valued at $170,000. The beneficiary would get the $50,000 basis plus the $20,000 increase in FMV.

My associate is saying that the NUA of $100,000, because it was within the pension plan, is not eligible for the step up in basis.

I don't know if this is true or not. He is pretty confident it is. Naturally, if this was stock purchased directly by any of us, beneficiaries would get the stepped up basis.

But, if you take out the transfer to beneficiaries scenario, you can see how for high net worth clients, taking the lump sum distribution on highly appreciated stock plans can create tax savings vs the rollover.

I am not an NUI expert - so I'd like to see the answer to your question as well.

Must be something to do with IRD.