When an stock owner dies, the cost basis for the stock(s) is adjusted to the closing price of the date of the owner’s death.
Is the basis for any open options in the deceased’s account adjusted similarly? How does that work given that there is no closing price, only the bid/ask prices at the end of the day?
~ Bruce
Not necessarily. If the price of the stock is higher than the original basis for the owner, it gets stepped up to ‘fair market value’ (FMV). FMV could be the closing price, an average of the open and close, an average of the high and low for the day, or some other reasonable calculation that you would feel comfortable explaining to the IRS.
If the FMV of the stock as of the date of death is lower than the original owner’s basis, the basis will remain as the original owner’s basis.
(Note - an alternative valuation date can also be chosen.)
You need to determine the FMV for the open options as of the date of death. Basing it on actual transactions will probably be better than basing it on bids and asks.
Similar to stocks - if the FMV is higher than the original owner’s basis, you use the FMV. If the FMV is lower than the original owner’s basis, then you keep the original owner’s basis.
AJ
I wasn’t aware there were other methods for determining FMV. Good to know.
Also wasn’t aware that you could using an alternative valuation date? Can you expand on that, i.e. what circumstances would it be beneficial to do that?
AJ - thank you much for your contributions to these posts.
The alternative valuation date is six-months post-death. If that alternative valuation date is used, it must be used for the entire estate, possibly with an exception for assets sold between the date of death and that six-month post death date (if I remember correctly).
A key time this would be beneficial would be if the estate is subject to the estate tax and the estate’s assets go down in value in that six month window. I think the estate tax can be as high as 40% federally and 20% in certain states, so for large estates, a more favorable tax treatment could make a huge difference in what portion of the property could get passed to the intended heirs.
Regards,
-Chuck
@XMFBigFrog has it correct. It has to be used for the entire estate, and is established that the alternative will be used by the executor. And it usually is used when the assets take a big dive in the 6 months after the date of death.
The downside is - if you establish a lower cost basis, you will be liable for higher capital gains when you sell.
AJ
Thanks, AJ. There’s a first time for everything, I guess.
-Chuck
I do more written/sold options than owned/bought ones. What happens to the valuation of open written/sold options positions upon death? I assume nothing changes since what we have for written/sold options at the date of death are the original sell prices, while the “cost basis” (the buy prices) are not determined until they are closed in the future. Am I thinking this correctly?
Thanks in advance for further clarification!
Kenny
If you had written/sold the same option (i.e. same closing dates, same prices) on the date of death, would it have changed in value from what it was originally written/sold for? If so, then the FMV of the option has changed, and may need to be adjusted.
I’m not sure how to explain it in options language, but basically if when the option will be closed out, you would have gotten a larger gain or suffered less of a loss by writing the option on the date of death, rather than when it was originally written, you should adjust the value to the FMV as of the date of death. If you would have gotten a smaller gain, or suffered more of a loss if the option had been written on the date of death, then you keep the original FMV.
AJ
I would venture to say that chances are the value would have changed. So adjustment may be needed.
Thank you as always for the enlightenment, AJ!
Kenny