Dear Harry,
I hope this message finds you well. I wanted to discuss a matter that has been weighing on my mind recently. You see, my mother passed away seven years ago, and her husband believed he was the beneficiary of her nonretirement and retirement accounts. However, it turns out that the beneficiary listed was actually her estate, which was closed in 2015.
Unfortunately, my mother's husband also passed away in April of this year. As a result, I have become the next in line to be the personal representative of my mother's estate, which I have reopened.
Now, I am faced with a question regarding the best way to disburse the funds to the beneficiaries. Various parties have provided conflicting advice on the matter. The financial adviser suggests cashing the stocks and distributing the cash, allowing the beneficiaries to deduct some tax losses for 2022. On the other hand, the estate attorney recommends leaving the stocks as they are and distributing them evenly among the beneficiaries.
As with many aspects of estate management, there is no one-size-fits-all answer. The best course of action may vary depending on the specific assets involved. Both the financial adviser and the attorney are considering factors such as ease of administration and tax implications when suggesting their respective options.
It is essential to understand the tax implications that arise from liquidating stock versus distributing the investments themselves. In particular, capital gains or losses are a significant consideration in this decision. The capital gain is calculated as the difference between the sale proceeds and the property's basis. The basis initially begins as the purchase price, but for assets passing through an estate (such as shares of stock, real estate, or artwork), the basis is adjusted to reflect the value on the owner's date of death.
In your mother's case, the basis of the stock in her estate was adjusted, or "stepped up," when she passed away. However, a crucial factor that will determine the most suitable course of action is whether the basis was adjusted again upon the death of your mother's husband (who I presume to be your stepfather).
In conclusion, the decision regarding the disbursement of funds in an estate is not a straightforward one. It requires careful consideration of various factors, including administration ease and tax implications. I encourage you to seek professional advice and carefully evaluate all the options available to ensure you make the most informed decision for your situation.
Best regards,
What to Do with Your Inherited Investments
The question of what to do with your mother's estate depends on who the beneficiaries are. If you and your siblings are the beneficiaries, then your estate attorney is likely correct in advising you. The investments received a step-up in basis upon your mother's death, which means there may be capital gains involved, considering the significant rise in the stock market since 2015. Despite the market's recent downturn, the stock values are still likely higher than they were in 2015.
However, if your stepfather is the beneficiary or one of the beneficiaries, the investments your mother left him will pass through his probate estate. These investments would have received a second step-up in basis upon your stepfather's death. Depending on his estate plan, they may or may not go to the same individuals named in your mother's will. In this scenario, it may make sense to liquidate those assets as suggested by your financial adviser, as they are more likely to have losses than gains (although with the market rebounding, this is not entirely clear). Under this circumstance, it is advisable to transfer the investments into your stepfather's estate first and distribute them according to his estate plan.
The above considerations mainly pertain to nonretirement accounts. The retirement accounts pose a potentially bigger problem, not in terms of liquidating the investments (which can be done within the accounts without incurring taxes), but in terms of inherited IRAs with required minimum distributions and potential penalties for neglecting them over the past seven years.
Considering all these complexities, I recommend setting up a meeting that includes both the estate attorney and financial planner. This will ensure that everyone is on the same page and that all aspects are covered. Depending on the attorney's expertise and the size of the retirement accounts, you might also need to consult a specialist for guidance on how to handle them.
