C and S Corporations in Estate Planning: Basics of Stock Basis

An intro to why a basis step-up may have limited utility

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Table of Contents

1. Intro

2. Basis Step-Up

3. Inside Basis Versus Outside Basis

4. General Utilities Doctrine

5. Discounting

6. Documenting Stepped-Up Basis

7. Conclusion

Intro

When it comes to estate planning for C and S corporations, one of the primary concerns is usually stock basis for shares held by a decedent at death.  But, depending on the situation, stock basis often has limited utility for shares that will continue to be held by beneficiaries of the estate instead of being sold.  In this article, we will introduce why, with subsequent articles focusing specifically on how to use stepped-up stock basis.   

Basis Step-Up

At death, assets included in the gross estate get a basis adjust to estate tax value under IRC Section 1014.  For appreciated stock, this is usually a step-up in basis.  For reasons we will later explain, the likelihood of a step-up is greater for a C corporation than for an S corporation, but this also allows certain leverage to create a double step-in in S corporation stock in certain situations, such as redemptions.  Estate tax value is usually fair market value at date-of-death, but may instead be the alternate valuation date (6 months after date of death) under IRC Section 2032 if elected.

Understanding the effect and utility of this basis adjustment often depends on determining whether the stock is held in a C corporation or S corporation.  This determination, however, is made as of the time the stock basis is used and not as of date of death.  In fact, it may be possible that the death of a shareholder (or post-death transfers or lack thereof) serve to terminate an S corporation election.  Alternatively, a C corporation could make an S corporation after the death of a shareholder, leading to a different use of stepped-up stock basis.  We will later discuss how and why, but for the time being it helps to take a high-level view of basis.