Considered Responses:

Question:

We were asked by an executor to assess the best course of action for an estate created by the death of a client in February of this year.

Response:

Normally an executor would sell any low basis shares at death. This is done without much pain because the step-up in basis has the effect of forgiving any unrealized profits. Further the executor desires to insulate the portfolio from market gyrations until the assets can be distributed to the heirs to both preserve their value and protect the executor from criticism of market judgments.

Not knowing what rules are to be applied to the estate could cause a great deal of consternation to the executor. If the shares are sold, then the ability to pass them on to heirs with a low cost basis is lost. If the shares are held they could lose value. We suggest the executor should insulate the portfolio through an option-based hedge. This way the values are “frozen” and all possible avenues are preserved. If the status quo persists through December, the heirs can decide a course of action at the end of this year or the beginning of next. If the 2009 laws are reinstated retroactively, the positions could be exited. The option-based hedge could possibly have an ancillary benefit if the shares have declined since the date of death through the alternative valuation mechanism.