Dear Harry,
My wife’s mother passed away a few months ago. She had a brokerage account in her name with her husband (stepfather) listed as the primary beneficiary and my wife and her brothers as secondary beneficiaries. The stepfather plans to distribute the assets equally to my wife and her brothers as their mother had requested. The stepfather told my wife the broker was going to sell the stock, which actually has gone up in value since her mother’s passing so, even with the step-up, there will be capital gains when the stock is sold. How should the assets best be distributed?
Dear reader,
This is a judgment call. It’s certainly easier to liquidate the stock and distribute the resulting cash. But in the situation you describe, this will result in some realized capital gains. As you rightfully say, the capital gains will only be the difference between the proceeds from the sale of the stock and the value on the date of your mother-in-law’s death. That’s because property receives a so-called “step-up” in basis upon the death of the owner.
Technically, any capital gains will be taxed to your stepfather-in-law as the owner of the account. It would seem fair that he be reimbursed for the resulting tax or that he hold back some funds to cover the cost.
The alternative would be to distribute the stock outright and not realize any capital gains. Then each beneficiary could decide what to do with their share and when to realize the capital gains. Usually the easiest way to do this is for each beneficiary to open an account at the same financial institution where the investments are being held. Once that’s done it’s relatively easy to split up the account. However, I had a recent inquiry about a similar situation where one child refused to set up an account, holding up the proceedings. So you would have to make sure everyone is on board and ready to act.
Finally, to really “geek out,” your stepfather-in-law could file a “disclaimer” which would direct the account to be treated as if he had died before your mother-in-law. Then the account would pass directly to your wife and her brothers as the next-in-line beneficiaries. They could then each deal with their share of the investments as they see fit. Such a disclaimer must be filed within nine months of your mother-in-law’s death. Depending on the circumstances, it might also require that your mother-in-law’s estate be probated, which depending on the circumstance might not otherwise be necessary.
All of the above said, I’m usually in favor of simply liquidating the account and distributing the proceeds. It’s the simplest way to proceed and the tax consequences are likely to be minimal.
This story originally appeared on Marketwatch
