The MLP Inheritance Playbook: A 90-Day Guide for Heirs

You inherited MLP units. Maybe you know what that means. Maybe you’ve never heard of a K-1, have no idea why your brokerage statement shows a “Schedule K-1” notification, and just want to know if you should sell these things.

Here’s what you need to know first: the person who left you these units did you a significant financial favor. Not because of what the units are worth today — but because of what happened to the tax basis the moment they died.

Your cost basis — the number the IRS uses to calculate your gain when you sell — was reset to the market value on the date of death under IRC §1014(a). It doesn’t matter that your parent bought these units at $37.50 and the basis had eroded to $3 after years of distributions. Your basis is whatever the market price was on the day they died. All the accumulated deferred tax? Gone. The §751 ordinary income recapture that would have cost them thousands if they’d sold? Gone.

You inherited a clean position. What you do with it in the next 90 days determines whether you keep that advantage or accidentally give it away.

For the reader who genuinely doesn’t know:

MLPs (Master Limited Partnerships) are publicly traded energy infrastructure companies — they own pipelines, storage facilities, and processing plants. They trade on stock exchanges like regular stocks, but they are structured as partnerships, not corporations. This matters for exactly one reason: taxes.

Why it’s different from regular stocks:

• Regular stocks send you a 1099-DIV at tax time. Simple.
• MLPs send you a Schedule K-1 (Form 1065). Less simple. The K-1 reports your share of the partnership’s income, deductions, and credits. It is more complex than a 1099, but it is manageable — especially if you only hold one or two MLPs.

Why the person who left you these units held them:

• MLPs typically pay high distributions (5-10% annually for midstream names).
• Most of the distribution isn’t taxed when received — it’s a “return of capital” that reduces your cost basis instead of being taxed as income.
• This creates a tax deferral that can last decades.
• At death, the deferred tax is eliminated entirely via §1014 step-up.

Your parent (or whoever left you these units) was running a specific strategy: collect distributions, defer taxes, and let the basis step-up at death eliminate the accumulated tax liability. The strategy worked. You’re the beneficiary.

If you want the deeper story on why they held these positions, see When Step-Up Basis Beats a Trust. But that’s optional reading. This guide is about what you need to do now.

Action 1 — Determine your stepped-up basis

Your cost basis is the closing market price of each MLP position on the date of death. Not the broker’s number. Not the original purchase price. Not what the units are “worth” today. The closing price on the date the prior owner died. That’s it.

Use the widget below to calculate your stepped-up basis per position. Look up the closing price on finance.yahoo.com (or any financial data site), enter it, and the widget shows your total basis.

Example: If you inherited 1,000 units of EPD and the closing price on the date of death was $37.50, your stepped-up basis is $37.50 per unit, or $37,500 total. It doesn’t matter that the original owner bought them at $25 or that the decedent’s adjusted basis had eroded to $3 per unit. Your number is $37.50.

Action 2 — Do NOT sell until the broker’s basis is corrected

This is the single most expensive mistake heirs make. Your broker almost certainly shows the decedent’s old, eroded cost basis — not your stepped-up basis. If you sell at the old basis, the broker reports a much larger gain to the IRS than you actually owe.

Do not sell any inherited MLP position until you have confirmed in writing that the broker has updated the cost basis to the date-of-death fair market value.

The phone script (read this word-for-word)

If you already sold at the wrong basis — the rescue path

It’s fixable. On your tax return, use Form 8949:

• Column (e): enter your correct stepped-up basis (date-of-death FMV × units)
• Column (f): enter adjustment code “B” (basis reported to IRS was incorrect)
• Column (g): enter the adjustment amount — the difference between the broker’s wrong basis and your correct basis

This overrides the broker’s 1099-B. Your CPA can handle this, but you need to tell them the correct basis — they can’t know it unless you provide the date-of-death closing price. If you’ve already filed your return, amend it with Form 1040-X within three years.

Action 3 — Collect the key documents

You’ll need:

• Death certificate (the broker will require this)
• Date-of-death market values for each position (you just looked these up)
• The most recent K-1 for each MLP (check the decedent’s tax files or email)
• The decedent’s most recent tax return (your CPA will need this for the final return)

Questions to ask the executor or trustee BEFORE calling the broker

Before you start calling brokers and CPAs, get these answers from whoever is managing the estate:

What your CPA needs from you — bring this packet to the first meeting

Print this list. Gather these 8 items. Walking in organized saves you $200-400 in billable hours:

If the units are in a trust

• The successor trustee needs an EIN for the trust (it’s now a separate taxpayer). Apply at irs.gov — takes 10 minutes.
• The trustee decides: distribute units to beneficiaries, hold in the trust, or sell. See MLPs in a Living Trust for the full analysis of these options.
• If distributing: coordinate with each beneficiary’s broker to transfer units at the correct stepped-up basis.

If the units are in an individual brokerage account

• The account goes through estate/probate (unless there was a TOD — Transfer on Death — designation).
• Once transferred to your account, verify the basis was updated correctly.
• You do NOT need a separate EIN unless the estate has significant income to report.

K-1 timeline awareness

• K-1s for the current tax year won’t arrive until late February through mid-March of the following year.
• The year-of-death K-1 covers the full calendar year but must be split between the decedent’s final return and the estate/trust return (or your return, if units were transferred during the year).
• You will likely need a CPA for the year-of-death tax filing. This is not DIY territory. Budget $500-1,500 for the additional complexity.

Contact each MLP’s transfer agent

• Large MLPs use transfer agents (Computershare, EQ Shareowner Services) who handle unitholder records.
• Notify them of the ownership change.
• They may require a copy of the death certificate and letters testamentary/administration.
• This ensures future K-1s are issued correctly in your name/EIN.

This is why you’re reading this article. Here are your options, with the actual math.

Option A — Sell immediately

With the §1014 step-up, your basis equals the current market value. If you sell at approximately the same price:

• Capital gain ≈ $0
• §751 ordinary income recapture = $0 (eliminated at death)
• Federal tax ≈ $0
• You receive cash equal to the market value of the positions
• No more K-1s, no state filings, no basis tracking
• You can reinvest in simpler assets (index funds, bonds, etc.)

This is the simplest option and it’s essentially tax-free. If you don’t want the complexity of K-1s, state filings, and basis tracking — selling immediately after step-up is the cleanest exit.

Option B — Hold and collect distributions

Your position is now identical to a brand-new MLP investment — bought at today’s price with a fresh basis. The distributions you receive will:

• Provide income (5-10% annually for midstream MLPs)
• Begin eroding your basis over time (the same cycle the prior owner experienced)
• Generate K-1s annually (one per MLP, filed with your personal return)
• Potentially require state filings in states where the MLP operates

The key insight for holders: you’re starting the cycle over from fresh basis. Your zero-basis date is ~16 years away (for EPD), not imminent. You have years of tax-efficient distributions ahead before basis becomes a concern. And if you hold until your own death, §1014 resets everything again for YOUR heirs.

Option C — Hold some, sell some

If you inherited multiple MLPs, you can be selective. Here’s a framework for deciding which to keep and which to sell:

The decision factors: how much K-1 complexity are you willing to manage? ET’s 3 separate K-1 entities across 40+ states is a meaningful annual burden. EPD’s single K-1 across ~20 states is manageable. If you’re keeping 2-3 positions, keep the simplest ones with the strongest distribution growth.

Option D — “I just want out.”

No judgment. Some heirs don’t want to manage K-1s, file multi-state returns, or think about basis tracking. That’s a legitimate choice. Here’s the fastest path out:

1. Correct the basis with your broker (Week 1 actions above — do NOT skip this)
2. Wait for written confirmation of the updated basis
3. Sell all positions in one transaction
4. Gain ≈ $0 thanks to the step-up. Tax ≈ $0.
5. Receive cash. Reinvest in whatever you’re comfortable with — index funds, bonds, savings.
6. No more K-1s. No state filings. Done.

Total time from inheritance to clean exit: 2-4 weeks. Total tax: approximately zero. You honored the strategy your parent ran (they collected distributions for years and let the step-up eliminate the tax), and now you’ve converted it to cash.

1. Selling before correcting the broker’s basis. The broker reports the old eroded basis on the 1099-B. The IRS sees a huge gain. You overpay. Yes, you can fix this on your tax return via Form 8949, but it’s much simpler to correct at the broker first. If you already sold at the wrong basis: tell your CPA. It’s fixable but annoying.
2. Assuming the K-1 is too complicated and panic-selling. The K-1 is more complex than a 1099, but it’s manageable — especially if you only hold 1-2 MLPs. Tax software (TurboTax, H&R Block) handles K-1 entry. Any competent CPA handles K-1s routinely. Don’t sell a position paying 8% yield just because the tax form is unfamiliar.
3. Not filing state returns where the MLP operates. MLPs operate in multiple states. Many states have minimum thresholds below which you don’t need to file. But if you ignore it entirely and a state notices, you’ll face penalties. Ask your CPA which states require filing for your specific MLPs.
4. Moving inherited MLPs into an IRA. If the inherited position is in a taxable account, do not transfer it to an IRA. MLPs in IRAs generate UBTI under §512, causing the IRA itself to owe tax. The §1014 step-up benefit only works in a taxable account. Keep inherited MLPs where they are.
5. Waiting too long to decide. The step-up locks in your basis at date-of-death FMV. But the market moves. If the price drops to $Y before you sell, you have a capital loss (which is actually useful — see below) but may not have been your intention. If you want the tax-free exit, act within the first 30 days while the price is close to your stepped-up basis.
6. Not realizing you can harvest a tax LOSS. If the market drops after the date of death, your stepped-up basis is HIGHER than the current price. Sell, and you have a capital loss — deductible against other capital gains and up to $3,000/year against ordinary income. Most heirs don’t realize this: you can inherit an asset and immediately have a tax loss. If the market has declined since the date of death, that may actually be the best time to sell — you get cash AND a tax deduction.
7. Not expecting the distributions. If you inherit in June, you’ll start receiving quarterly distribution checks in July or August. This surprises many heirs. The distributions are taxed to you from the date of death forward — they’ll show up on the K-1 you receive next February. Don’t spend them without setting aside estimated tax. The taxable portion is typically 10-30% of the distribution amount.

If you’ve decided to hold (all or some), set yourself up properly:

1. Start tracking your basis from the stepped-up date. Your basis starts at the date-of-death FMV. From here, it will erode with each distribution, just as it did for the prior owner. Use the K-1 Basis Tracker to maintain your running basis — your broker will NOT track this correctly for MLP positions.
2. Set up a filing system for K-1s. You’ll receive K-1s in February-March each year. Each MLP sends its own K-1. Keep them organized by ticker and year. Your CPA will need them.
3. Understand your state filing obligations. Ask your CPA which states require non-resident filings for each MLP you hold. EPD: ~20 states. WES: ~5 states. ET: ~40+ states plus 3 separate K-1s — the most complex of any major MLP.
4. Set a calendar reminder for K-1 season. MLPs typically release K-1s between late February and mid-March. Many investors file for a tax extension because K-1s arrive late. This is normal. See the K-1 Release Dates tracker for current status on every major MLP.
5. Consider your own estate plan. You’re now in the same position the prior owner was: holding MLP units that will erode in basis over time, with the opportunity to pass them to YOUR heirs via §1014 step-up. The generational cycle continues — if you want it to.

If you’re the surviving spouse, not a child or other beneficiary, several things change.

You may already be on the account. If the MLP positions were held in a joint account or community property account, you may already have ownership without a transfer. But the basis still needs to be updated to reflect the step-up.

Community property doubles your benefit. If you’re in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, WI), BOTH halves of the MLP positions step up under §1014(b)(6) — including your half that you still own. See Community Property and MLPs for the full dollar-value analysis per state.

You’re likely continuing the same strategy. Your spouse held these positions as a long-term income and estate planning strategy. You now have fresh basis. The optimal path is often to continue exactly what your spouse was doing: hold, collect distributions, let basis erode over time, and let §1014 handle it again at your own death for the benefit of your children.

Your 20-year projection starts from a stronger position. With the stepped-up basis, your zero-basis date is pushed out by a decade or more. You have years of tax-efficient distributions ahead.

Starting from your stepped-up basis at full market value, your position is identical to a brand-new MLP investment. Use the projector below to see your specific numbers:

The key insight: starting from a stepped-up basis of $37.50 per EPD unit, your position won’t reach zero basis until approximately Year 16-18 — on par with the original owner’s Year 16, because distribution rates are similar but you start from current FMV rather than the decedent’s original purchase price. You have roughly the same length of tax-efficient runway the prior owner had.

If you hold until your own death: §1014 resets the basis again for YOUR heirs. The generational tax-deferral cycle that benefited you continues for the next generation.

Coming soon: Inheriting US MLP units as a non-US resident — withholding, treaty benefits, and reporting requirements (§1446, Form W-8BEN, §897 FIRPTA).