Funding a pecuniary bequest with appreciated property produces a tax consequence many executors do not see coming: the estate is treated as if it sold the asset at fair market value on the funding date, and any appreciation above basis is taxable capital gain on the estate’s fiduciary income tax return. The beneficiary, by contrast, generally receives the fixed dollar amount free of income tax and takes a fresh basis in whatever property is used to satisfy the gift. Those two rules — gain to the estate, clean receipt to the beneficiary — drive almost every planning decision around pecuniary bequests.
Why the Fixed Dollar Amount Matters
A pecuniary bequest is a gift of a specific dollar amount. The will might say “I leave $100,000 to my niece,” and that number does not move with the estate’s value. The beneficiary has no claim to any particular asset — only to the dollar figure. The estate owes a debt in that amount.1Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662
That debt structure is what creates the tax consequences. Cash satisfies the debt with no tax effect. Property satisfies it only by first being valued in dollars, and the act of valuing appreciated property to pay a fixed obligation is what the IRS treats as a realization event.
Capital Gain to the Estate on Funding
When an executor transfers appreciated property to satisfy a pecuniary bequest, the estate recognizes capital gain as if it had sold the asset.2Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss The principle comes from the 1940 decision in Kenan v. Commissioner, which held that using appreciated securities to pay a fixed-dollar obligation converts the appreciation into payment of a debt and is a taxable realization event.
The gain equals the fair market value on the funding date minus the asset’s basis. Basis is usually the stepped-up value established at death under Section 1014.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If the estate funds a $150,000 bequest with stock that had a date-of-death basis of $100,000 and a current value of $150,000, the estate reports $50,000 of capital gain on Form 1041.
The size of that tax bill can surprise executors because estates hit the top brackets almost immediately. In 2026, estates and trusts reach the 37% ordinary income rate at just $16,250 of taxable income. Long-term capital gains above the estate’s threshold are taxed at 20%, and the 3.8% net investment income tax often stacks on top, pushing the effective rate to 23.8%. A pecuniary bequest funded with heavily appreciated stock can generate a five- or six-figure tax liability the estate did not anticipate.
Losses Are Deductible — the Section 267 Carve-Out
Federal tax law usually disallows losses on transactions between related parties, and estates and their beneficiaries are related parties for this purpose. But Section 267(b)(13) carves out an exception: the related-party loss rule does not apply “in the case of a sale or exchange in satisfaction of a pecuniary bequest.”4Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
So if the executor funds the bequest with property that has fallen in value since death, the estate can recognize and deduct the capital loss. The logic mirrors the gain rule. Executors holding a mix of appreciated and depreciated assets can use this deliberately, selecting depreciated property for funding to generate losses that offset gains elsewhere in the estate.
Valuation Method Changes the Tax Bill
The will or applicable state law tells the executor which valuation method to use for funding. The two main options produce very different income tax results.
Date of Death Valuation
Assets are valued at their fair market value on the decedent’s date of death. If those assets have appreciated between death and distribution, the beneficiary receives that built-in gain along with the property, because fewer shares are needed to hit the dollar target on paper — but the executor still transfers the full number set by the date-of-death price. A $100,000 bequest funded with stock worth $10 at death takes 10,000 shares, even if the stock is now $15. The beneficiary walks away with $150,000 of value against a $100,000 bequest, and the estate typically reports a larger capital gain because the spread between stepped-up basis and current market value has widened.
Date of Distribution Valuation
Assets are valued on the day they are transferred. With the same stock now at $15, the executor needs only about 6,667 shares to satisfy the $100,000 bequest. The residuary estate keeps the rest and captures the post-death appreciation. This method generally produces smaller capital gains, sometimes none, and is simpler because the numbers reflect current prices. Planners looking to minimize the income tax cost of funding often prefer it.
The Beneficiary’s Position: Fresh Basis and No Income Tax
Two rules work in the beneficiary’s favor.
First, because the estate has already recognized gain or loss on the funding transfer, the beneficiary takes a fresh basis in the distributed property equal to its fair market value on the date of distribution. Stock worth $150,000 used to satisfy a $150,000 bequest gives the beneficiary a $150,000 basis. The same appreciation is not taxed twice.
Second, the bequest is excluded from the estate’s distributable net income (DNI). Estates and trusts normally pass taxable income through to beneficiaries who receive distributions, but Section 663(a)(1) provides that a gift of a specific sum of money — paid all at once or in no more than three installments — does not carry out DNI.1Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662 The estate cannot deduct the distribution, and the beneficiary does not report it as income.
The exclusion applies only if the bequest is a “specific sum” — a dollar amount fixed by the will or by a formula, not one that fluctuates with estate income. A bequest payable only from estate income does not qualify.1Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662 Drafting to meet this requirement is straightforward, but missing it turns a tax-free receipt into taxable income.
Formula Pecuniary Bequests: True Worth vs. Minimum Worth Funding
Formula pecuniary bequests are common in estate plans for married couples. A typical formula funds a bypass trust with “the largest amount that can pass free of federal estate tax” and leaves the rest to the surviving spouse or a marital trust qualifying for the unlimited marital deduction under Section 2056.5Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse For 2026, the federal estate tax basic exclusion amount is $15,000,000 per person, and the formula produces a specific dollar figure keyed to that exemption, reduced by any lifetime taxable gifts.6Internal Revenue Service. What’s New — Estate and Gift Tax
How the formula is funded drives the income tax result:
- True worth funding values the pecuniary share at the date of distribution. Post-death appreciation or depreciation in the non-pecuniary share stays with the residuary beneficiary, and the funding triggers gain or loss recognition under the Kenan principle.
- Minimum worth funding values the pecuniary share at the lesser of estate tax value or date-of-distribution value. Because the executor never transfers assets for more than their estate tax basis, funding does not produce gain. The trade-off is less flexibility in asset selection and potential complications for generation-skipping transfer tax planning.
Executors administering a formula bequest should model the income tax cost under each method before selecting which assets to transfer. At the estate’s compressed rates, a large gain on funding can meaningfully shrink what actually reaches the beneficiaries.
Basis Reporting on Form 8971
If the estate is required to file Form 706, the executor must also file Form 8971 and furnish a Schedule A to each beneficiary who receives property. Form 8971 reports the estate tax value of the property distributed and gives the beneficiary the basis information needed to comply with the consistent basis requirement under Section 1014(f).7Internal Revenue Service. Instructions for Form 8971 and Schedule A3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The consistent basis rule prevents a beneficiary from claiming a basis that exceeds the value reported on the estate tax return. For a pecuniary bequest funded with property, the estate has already recognized gain and the beneficiary’s basis equals the distribution-date fair market value, but that value must remain consistent with what the estate reported.
Form 8971 is due 30 days after the earlier of the Form 706 due date (including extensions) or the actual filing date. Supplemental filings for property acquired after the initial return are due by January 31 of the following year. Estates that file Form 706 solely for portability, for GST allocation, or as a protective filing are not required to file Form 8971.7Internal Revenue Service. Instructions for Form 8971 and Schedule A
Interest on Delayed Payment
Most states require the estate to begin paying interest on an unpaid pecuniary bequest once a statutory waiting period ends. The rate varies by state. That interest is deductible by the estate as an administration expense and taxable to the beneficiary as ordinary income — a very different tax result from the underlying bequest itself, which comes out income-tax-free. A well-drafted will can waive or modify the interest requirement, which is worth reviewing when the estate holds illiquid assets that will take time to convert.
One Boundary Worth Naming
The alternate valuation date election under Section 2032, which lets the executor value the gross estate six months after death for estate tax purposes, is a separate concept from choosing between date-of-death and date-of-distribution funding.8Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation The alternate valuation election is available only if it reduces both the gross estate and the estate tax liability, and it affects the estate tax calculation and the stepped-up basis of inherited property. It does not determine the valuation method for funding a pecuniary bequest.