When someone dies his estate includes the assets and property he owned at the time of his passing. If the estate includes stocks, there are certain rules about figuring their worth for tax purposes. If the stocks involved pay regular dividends, it raises another accounting question: do the dividends become part of the estate?
If you own shares in a company you may also receive dividends from the company's earnings. Most dividend-paying businesses pay out quarterly or annually. It's a financial bonus for buying in and the dividends help support the stock's market value. The payout begins with a declaration of the dividend by the company, known as the declare date.
Show Me the Money
When a company declares a dividend, it announces the amount per share to be paid and the record date. You must own the stock on the record date to get the dividend. The record date is followed by the payment date, when you actually receive the dividend. The company transfers the dividend to the brokerage or custodian holding your stocks. If you own the physical share certificates and have no custodian, you either receive a check in the mail or the money is automatically transferred to your bank account.
Taking Stock in Estates
If you pass away, any stock you own becomes part of the estate. If the stock pays a dividend after your death, the dividend is considered part of the estate when it's paid. For valuation of the estate for tax purposes, which must take place on a specific date, a declared dividend may not need to be included.
The Internal Revenue Service collects estate tax on large estates and for this reason it needs an estate to be properly valued. That's the job of the estate administrator or trustee, who completes a Form 706, U.S. Estate Tax Return, as well as the form's Schedule B, which lists all stocks and bonds. The administrator, who must declare the valuation date for the estate tax return, has a choice: use either the date of death or an alternative date at most six months later. The administrator must value all assets on the same day at their fair market value on that day, not what they cost on the date of purchase.
If the death takes place after the declare and record dates but the dividend has yet to be paid, the IRS still wants the full accrued dividend included in the valuation because the estate is entitled to it. If the valuation date is before the record date, the dividend is not included. There is one exception: if you sold the stock ex-dividend, meaning the dividend amount has already come out of the stock price, then you must include the dividend in the estate valuation.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.