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

You just inherited MLP units. Your broker’s cost basis is wrong. Here’s exactly what to do — day by day — so you don’t overpay thousands in taxes. Phone scripts, rescue paths, and the hold-vs-sell math, computed from the engine.

By Lucas Andersen — Masters in Finance, proprietary energy trader, direct MLP holder

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This guide is for educational purposes. It does not constitute tax, legal, or investment advice. Inheriting assets involves legal and tax complexities specific to your situation. Consult a qualified CPA and estate attorney. If you’re dealing with a recent loss, take the time you need — most of these decisions can wait a few weeks.

Key Takeaways

  • Your cost basis is NOT what the broker shows — it’s the fair market value on the date of death under §1014(a), not the decedent’s original purchase price or eroded adjusted basis.
  • If you sell immediately at the stepped-up basis, your capital gain is approximately $0 — the cleanest tax-free exit available under current US law.
  • All §751 ordinary income recapture accumulated by the prior owner was eliminated at death. You start from zero §751 exposure.
  • Your broker will almost certainly carry forward the wrong (old) basis — you must correct it in writing before selling anything.
  • Whether to hold or sell is a real choice, not a default. This playbook shows the math for both paths and the clean-exit version for “I just want out.”

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: your cost basis was reset to the market value on the date of death under IRC §1014(a). All the accumulated deferred tax — and all the §751 ordinary income recapture — was eliminated. You inherited a clean position. What you do in the next 90 days determines whether you keep that advantage.

What Are These Things and Why Do I Have a K-1?

MLPs (Master Limited Partnerships) are publicly traded energy infrastructure companies that own pipelines, storage, and processing. They trade like stocks but are structured as partnerships. Partnerships issue Schedule K-1 (Form 1065) instead of 1099-DIV. MLPs typically pay 5-10% annual distributions, most of which isn’t taxed when received — it’s “return of capital” that reduces your cost basis instead. The prior owner ran this strategy for years: collect distributions, defer tax, let §1014 step-up eliminate the accumulated liability at death. The strategy worked. You’re the beneficiary.

Days 1-7: Three Things That Can’t Wait

Action 1 — Determine your stepped-up basis. Your basis is the closing market price of each position on the date of death. Not the broker’s number. Not the original purchase price. Look up the closing price on finance.yahoo.com for each ticker on that date. That’s your per-unit basis.

Action 2 — Do NOT sell until the broker’s basis is corrected. Example: broker shows $3/unit (the decedent’s eroded basis); you sell 1,000 units at $37.50. Broker reports a $34,500 gain. Your actual basis is $37.50/unit, so your actual gain is $0. At 32% ordinary + 3.8% NIIT (if §751 portion applies), that’s roughly $11,000 overpaid. At 15% LTCG + 3.8% NIIT, roughly $6,486. Do not sell until you have written confirmation the broker has updated the basis to date-of-death FMV per IRC §1014.

The phone script: “Hi, I’m calling about account [number]. The account holder, [name], passed away on [date]. I need to update the cost basis on the MLP positions to the fair market value on the date of death, per IRC Section 1014. The current basis is the decedent’s adjusted basis and is not correct for my tax situation as the inheritor. Can you please update the cost basis to the closing prices on [date of death]?” Escalate to the broker’s estate/inheritance services department if the first rep is unfamiliar with §1014. Get confirmation in writing.

If you already sold at the wrong basis: use Form 8949. Column (e) = your correct stepped-up basis. Column (f) = adjustment code “B” (basis reported to IRS incorrect). Column (g) = the difference. This overrides the 1099-B. Amend with Form 1040-X within 3 years if you already filed.

Action 3 — Collect key documents: death certificate, date-of-death market values, the most recent K-1 for each MLP, the decedent’s most recent filed tax return.

Days 8-30: Getting the Paperwork Right

Six questions to ask the executor/trustee BEFORE calling the broker: (1) exact date of death, (2) was the Alternative Valuation Date elected under §2032 (if yes, your basis is the 6-month price, not the death-date price), (3) were any positions sold between death and now, (4) is there a trust and who is the successor trustee, (5) are there state estate tax implications, (6) was a §645 election made. Most executors don’t elect §2032, but ask — it changes your basis materially.

Packet for the CPA: death certificate, date-of-death closing prices per position, most recent K-1s, decedent’s last tax return, trust document (if applicable), broker statements showing current (wrong) basis, your SSN and filing status, your decision on hold vs sell. If units are in a trust, the successor trustee needs an EIN (10 minutes at irs.gov). Budget $500-1,500 for CPA help with the year-of-death filing — the split-year K-1 allocation between decedent’s final return and estate/trust return is not DIY territory.

The Decision That Determines Everything: Hold or Sell?

Option A — Sell immediately. With §1014 step-up, basis = current FMV. Sell at ~FMV: gain ≈ $0, tax ≈ $0. No more K-1s, no state filings, no basis tracking. Reinvest in index funds. Cleanest tax-free exit available under current US law.

Option B — Hold and collect distributions. Identical to a brand-new MLP investment at fresh basis. 5-10% annual distributions, basis erodes again over time, K-1s annually, possible multi-state filings. Your zero-basis date is ~16 years out (for EPD), not imminent. If you hold until your own death, §1014 resets everything again for YOUR heirs.

Option C — Hold some, sell some. Decision factors by ticker: EPD (1 K-1, ~20 states, low complexity, good hold). MPLX (1 K-1, ~17 states, 9.1% growth, good hold). WES (1 K-1, ~5 states, lowest complexity, good hold). PAA (1 K-1, ~18 states, good hold). ET (3 separate K-1s, ~41 states, HIGH complexity — consider sell). NRP (1 K-1, ~10 states, 0% growth — income vs. growth tradeoff).

Option D — “I just want out.” Correct the basis, wait for written confirmation, sell all, receive cash. Gain ≈ $0. Total time: 2-4 weeks. Selling after step-up isn’t wasting the inheritance — it’s completing the strategy.

What NOT to Do (These Mistakes Cost Thousands)

  1. Selling before correcting the broker’s basis.
  2. Panic-selling because the K-1 looks complex (tax software handles K-1s; CPAs handle them routinely).
  3. Not filing state returns where the MLP operates.
  4. Moving inherited MLPs into an IRA (UBTI under §512; no step-up inside an IRA).
  5. Waiting too long to decide — market moves before you lock in the tax-free sale.
  6. Not realizing you can harvest a tax LOSS if the market dropped after date of death.
  7. Spending the first quarterly distribution without setting aside estimated tax (10-30% of distribution is typically taxable).

Spousal Inheritance: Your Situation Is Different

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. See Community Property and MLPs. Continuing the strategy your spouse ran is typically optimal: hold, collect distributions, let §1014 handle it again at your own death for your children. There’s no wrong answer — only informed ones.

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