Dear Harry,
My mother died seven years ago. Her husband thought he was the beneficiary of both her nonretirement and retirement accounts managed by a financial adviser, but the beneficiary was actually listed as her estate, which was closed in 2015.
Her husband passed in April of 2022 and, after his passing, I am now the next in line to be the personal representative of my mother’s estate, which I have reopened.
My question is what is the best way to disburse those funds to the beneficiaries? I am getting conflicting advice. The financial adviser suggests cashing the stocks and disbursing cash, so the beneficiaries can deduct some of the tax losses for 2022. The estate attorney says to leave them as stocks and disburse those evenly to the beneficiaries.
Dear reader,
As always, the answer depends and it may be different with respect to different assets. Both the financial adviser and the attorney are considering both ease of administration and the tax implications of the two options — liquidating the stock and distributing the proceeds or distributing the investments themselves.
Read: My mom had a trust, so why do we still need probate to settle her estate?
The tax implications flow from the capital gains or losses on the sale of stock and these depend on the stock’s basis. Capital gain is determined as the difference between the proceeds of sale and the property’s basis. The basis starts as the purchase price, but for property — shares of stock, real estate, artwork — that passes through an estate, the basis is adjusted to the value on the owner’s date of death.
The basis in the stock in your mother’s estate was first adjusted, or “stepped up,” when your mother died. The question that will determine the best course of action is whether they were adjusted again upon the death of your mother’s husband (I assume your stepfather).
The answer depends largely on who the beneficiary or beneficiaries of your mother’s estate were. If they were you and your siblings, then probably your estate attorney is right. The investments received a step-up in basis upon your mother’s death, so there’s likely to be capital gain with respect to these investments since the stock market has risen steeply since 2015; even though it also dropped precipitously this past year, the stock values are likely to be much higher than they were in 2015.
On the other hand, if your stepfather was the beneficiary or a beneficiary of your mother’s estate, then whatever your mother left him should pass through his probate estate. Those 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 pass to the same people as named in your mother’s will. In this case, it probably makes sense to liquidate those assets since, as the financial adviser suggests, they are more likely to have losses than gains (though with the market rebounding, even this isn’t clear). Under this scenario, the investments probably should first be transferred into your stepfather’s estate and then distributed according to his estate plan.
All of the above has to do with the nonretirement accounts. The retirement accounts may be a bigger problem, though not with respect to liquidating the investments; you can do that within the accounts at any time without incurring any taxes. The problem is that as of your mother’s death these became inherited IRAs with required minimum distributions and potentially penalties for not having taken them over the past seven years.
Given all of the moving parts, I would recommend that you set up a meeting that includes both the estate attorney and the financial planner to make sure everyone gets on the same page. Depending on the estate attorney’s level of expertise and the size of the retirement accounts, you may also need to engage a specialist to advise you on how to handle them.
