Ward Disputes Recommended Sale Of Stock From His Estate

Here, an 84-year-old man worth nearly $2.5 million disputed the actions of his conservator (a bank) with respect to his stock portfolio. About half of the ward’s entire net worth consisted of stock in ExxonMobil. The conservator determined that it was unwise to hold such a concentration of one stock and recommended a liquidation plan, whereby at least 10% of the stock would be sold each year until the total holdings of the stock were 10% of the estate. The ward, through his guardian, opposed the bank’s plan. The trial court sided with the conservator, but modified the proposed plan by providing for a sale of most of the stock over two years. The court rationalized that such a high concentration of holdings was too risky and that the tax consequences of retaining the stock would be burdensome to the ward’s beneficiaries upon his death. 

The ward appealed and argued that the trial court, in recommending a liquidation of the stock, failed “to conduct an adequate inquiry” into the ward’s “unique circumstances.”  The appellate court agreed, and reversed.  The key factor in this case was “the expected tax consequences of investment decisions or strategies.” The ward bought the stock nearly 50 years ago at a price of $15.19 per share. Today, the projected sale price is $70. The ward argued that if the shares of stock were sold during his lifetime, the gains would be subject to federal and state capital gains (15% and 9% respectively). The ward also argued that if the stock was sold after his death, the beneficiaries of his estate would receive the benefit of a stepped-up basis for the valuation of the stock. The bank agreed, but argued that the gain from the sale of the stock during the ward’s life would be offset by losses on the sale of other investments. 

The appellate court sided with the ward and discussed some of the changes that we have faced in 2010 since Congress has not dealt with the issue of the federal estate tax and basis issues. Prior to 2010, beneficiaries could take advantage of “stepped-up basis”- allowing them to establish a basis in the stock at their value at the date of the ward’s death.  For deaths in 2010, there is no full fair-market value stepped-up basis in effect if the inherited assets are sold in 2010.  Instead there is a modified carryover basis in place – the executor may use a $1.3 million “aggregate basis increase” and allocate that amount (on an asset-by-asset basis) to increase the basis in qualified assets. Stock is a qualified asset. 

For tax years beginning after 2010, the law reverts to the pre-Estate and Gift Tax Reform Act (EGTRA) rules (adopted in 2001), which provide for a basis step-up. (Note:  The court even noted that §901 of EGTRRA specifies that none of the EGTRRA provisions apply to tax years (for all tax purposes) beginning after 2010, but didn’t clearly make the connection to EGTRRA not applying to assets inherited in 2010 that are sold in a post-2010 year).  The appellate court noted that the age of the ward and his history of chronic illness influenced their decision. Even if the stock went down in price, the court noted that the sale of farmland owned by the ward could cushion that blow. The appellate court also stated that the ExxonMobil stock held “special value” to the ward and his beneficiaries. The ward’s daughter (and potential beneficiary) stated that the stock has been a solid performer and “kept us alive.” Thus, the appellate court reversed the trial court’s order for sale of the stock. In re Guardianship and Conservatorship of Hatfield, No. 0-218/9-1309 (Iowa Ct. App. May 26, 2010).