You might best hold MLPs for life if you can see the end of life, either for you or for your spouse, because of the automatic upgrade upon a death of either. If you cannot see the end of life, you might better consider trading.
Most MLPs I have dealt with lose their tax basis rapidly, by much more than the amount of the distribution.
For example, I have held 10,000 shares of EPD since the end of 2009, when my wife died..
In the 3 years since then my tax basis has declined from $285,262 (eo2009) to $128,673 (eo2012),
ie, by $156,589. The dividends paid over those 3 years totaled $72,225.
It looks as if my tax basis in EPD will reach ZERO sometime in 2014, at which time I must start paying ordinary income taxes on all EPD distributions. The only way I can see to avoid this huge hit is to keep the tax basis positive, by continually buying more shares of EPD, —-a lot more, — at least two times the amount of each distribution.
Can anybody see another way out?

Roger,
Can you explain why EPD loses tax basis so much more rapidly than the amount of distributions?
Most other MLPs also lose tax basis faster than the amount of their distributions.
It’s an unusual one that doesn’t
TYVM

Loss of tax basis in excess of distributions seems to create a tax disadvantage of MLPs. At time of sale you will be taxed on that loss of tax basis. If that, as in Ralph Carey’s EPD, is 2X the distributions, you will then be taxed, in effect, a double the cap gains rate.

There is another way to think of this situation you are in. How much has EPD’s distributions increased since your purchase? what is your yield today on invested capital? how much do you expect their distributions to increase in the future? It may be advantageous to keep the EPD, pay the increased tax burden. You may still be miles ahead of alternative investments. For example, if their distributions today result in say an 11% yield on invested capital and you pay 44% taxes on those, that is a 6.16% after tax yield. That is still one great return. Can’t get that anywhere else.
one example- I bought some KMP in 2004 at $46.82. At time of purchase, it was yielding 7%. with their distribution increases over the years, it now yields 14.85% on my investment. Not bad, eh? Even if I pay 44% regular income taxes on today’s distributions, the after tax yield is 8.3%. I’ll take that all day long.

Yes, Roger, you have a point. And it may come down to that in any event.
I am a 92-yr old amateur investor. It has occurred to me that I might have been better off diversifying more, rather than putting the lion’s share into EPD. If I had bought into a different MLP each year, the ZERO tax bases would be spread out & quite possibly, some ZEROs would never be encountered. Do you agree?

Ralph,

I would like to better understand your math. You indicated that you purchased 10,000 shares of EPD for approximately $28.50/ share. Based upon today’s price of $60.26 you have an unrealized gain of approximately $317,000 over the three years. A return in excess of 100%. Additionally you have deferred over the three years $156,589 as a return of capital, which gave you the opportunity to invest or spend, not to mention the $72,225 in dividends. If you had traded EPD rather than hold over this period I would seriously doubt you would have been better off from a return on invested capital perspective or in total return. I have both traded and held my MLPs and regretted that I sold the comparable quality MLPs to EPD. I still hold EPD with a 104.5 % percentage gain which I began purchasing in 2/2009. At some point it may make sense to sell but I would avoid trading MLPs. If you want to trade it would be better to trade the ETFs.

Ron,
If you believe that MLPs will continue advancing indefinitely, you are undoubtedly right to never sell. However, I do think that the past 4 years are something of an anomaly, propelled by increasingly lower interest rates. Take a look at the previous 4 years from eo DEC 04 to eo DEC 08. Closing prices for those years for EPD were, respectively, 25 86 & 20.73. The distributions hardly made up for this loss. If we are subject to another such decline, it would be better to trade, don’t you think? I’m certainly not recommending it today. Have no idea what the probabilities are. But do believe that trading should be a considered option, even today. Hope I have responded to your question.

Do heirs inherit the owners tax basis or is their tax basis the value of the investment at time of inheritance? Lynn Zimmerman