Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

131

1969-1 C.B. 131. Accordingly, when the participant’s beneficiaries sell the employer stock that is

distributed to them from the plan in a qualifying distribution, the NUA portion of the sale proceeds

is long-term capital gain. They will get a

deduction

for the estate taxes paid on

the NUA.

2.5.04

Basis of stock distributed in life, held until death

When the employee receives a distribution of employer stock and the NUA is excluded

from his income, his basis in the stock going forward is the value that

was

taxed upon distribution,

i.e.,

the plan’s original cost basis in the stock. If the employee still holds the stock at death, the

IRS has ruled that such stock does

not

receive a stepped-up basis (under

to the extent

the employee benefitted from exclusion of NUA. According to the IRS, the NUA retains its

character as NUA even after the employee’s death, and will constitute IRD to the employee’s heirs

when they eventually sell the stock. Only to the extent, if any, that the stock appreciated in value

after

it was distributed to the employee by the plan does it receive a stepped-up basis. Rev. Rul.

75-125, 1975-1 C.B. 254.

Note:

does not apply for deaths in 2010; see

Though Rev. Rul. 75-125 has not been revoked, the IRS may have changed its mind on

this issue. One indication of this is that the IRS has allowed NUA-stock recipients to assign their

stock and its NUA to charitable remainder trusts (CRTs;

; see PLRs 1999-19039, 2000-

38050, and 2002-15032. If the NUA represented unrealized income, an assignment of it should

trigger income tax, but the IRS in those PLRs did not rule that assignment of NUA stock to a CRT

caused realization of the underlying income by the employee-assignor. Also, in PLR 2000-38050

(eighth ruling), the IRS ruled that NUA stock contributed by the employee to a charitable

remainder trust

would

get a stepped-up basis to the extent the CRT was included in the employee’s

estate; this directly contradicts Rev. Rul. 75-125.