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By Sarah Brenner, JD
Director of Retirement Education
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Question:

I need guidance on a new client with the following information:

  • Is age 55;
  • Has a $700,000 ESOP in a company that he separated from over 10 years ago; and
  • Wants diversification.

Since he separated from the company over 10 years ago and is now age 55, would he be eligible for the following:  Have the ESOP transferred to a traditional brokerage account, pay income tax on the cost basis, pay no early withdrawal 10% penalty, diversify the stock, and pay long-term capital gain tax via the Net Unrealized Appreciation (NUA) tax break provision on the appreciated value.

Thanks, Eric

Answer:

Hi Eric,

If there is highly appreciated company stock in a plan, it is always worth at least considering the NUA strategy. That strategy allows long-term capital gains treatment on the appreciation of plan-held company stock that is distributed in kind from the plan to a nonqualified account. The cost basis is included in taxable income and any appreciation after distribution is subject to the standard rules for capital gains treatment.

To qualify for NUA, there must be a triggering event. Both separation from service and reaching age 59 ½ are triggering events. You must also have a lump sum distribution. This means that all funds in like plans must be emptied in one year. Any distributions taken after the triggering event but before the year of the lump sum distribution would kill the opportunity to do NUA. Also, some ESOPs (especially with privately-held companies) may impose restrictions on distributions or on the period stock can be held outside the ESOP in a way that makes the NUA tax break impossible or limits its advantages.

You mention that the individual is age 55 now, but separated from service 10 years ago. That would mean that the cost basis would be taxable and subject to the 10% early distribution penalty. The age 55 exception only applies to those who separate from service in the year they reach age 55 or later and that is not the case here.

Hopefully, this points you in the right direction. Any potential NUA transaction should be discussed in detail with the client. There are many nuances and finer points that should be addressed thoroughly. We like to say that NUA is an art and not a science.

Question:

If the estate is the beneficiary of an IRA, can the estate do a qualified charitable distribution (QCD) with the year of death RMD?

Thanks!

Answer:

It is possible for some beneficiaries to do a QCD from an inherited IRA. However, it will not work for an estate. That is because to do a QCD you must be age 70 ½ or older. An estate cannot satisfy this requirement.

https://irahelp.com/slottreport/net-unrealized-appreciation-and-qualified-charitable-distributions-todays-slott-report-mailbag/