Should Executor Sell Stock in Estate or Distribute Shares to Beneficiaries?

 In Probate
Stock in estate

Photo by Carlos Muza on Unsplash

Question:

My mother is 96 and has most of her assets in stocks. She has five children and wants to divide the assets in five equal parts. I am currently named as the executor of her estate. How does one decide how stocks are split? Is each stock holding divided in five?

Response:

This is a common situation in estates. Should stock be split among beneficiaries or sold and the proceeds split? It’s much easier to simply liquidate the stock holdings and distribute cash, and this is the advice I usually give clients. After your mother’s death, the stock will receive a step-up in basis so there will be little or no capital gains subject to tax once the stock is sold.

Despite the fact that this is usually the easier way to go, there are instances where clients choose to hold on to the stock. Sometimes they have an emotional attachment because the stock represents a nest egg that a parent or grandparent created by saving and investing over many years. In other cases, the property may not receive a step-up in basis upon death because it’s in trust. For instance, if the property is passing to the next generation because a trust created by a grandparent or pre-deceased parent is now being terminated, it will not receive a step-up and its liquidation would cause an otherwise unnecessary capital gains tax. In such a case, it makes more sense to split the stock among the various beneficiaries.

Often, if that’s the course the family chooses to take, its most easily accomplished by each of the beneficiaries creating an account in the same investment house where the estate or trust already holds the stock. Then it’s relatively simple for the broker to split the stock among the various accounts.

Related Articles:

What’s a “Step-Up” in Basis and Why Would You Want It?

As Trustee Should I Distribute Investments or Liquidate them to Distribute Cash?

What’s the Best Method to Distribute Tangible Personal Property in an Estate?

Showing 7 comments
  • Larry Smith
    Reply

    Question, I always thought that if the stock was sold before distributed, it was taxed to the Moms estate, so more prudent to distribute the stock which is easy. Been there before, with the advise of my accountant. What am I missing?

      • Harry Margolis
        Reply

        Technically, that’s right, but practically not. If the estate sells the stock, any gain will have to be reported on the estate’s tax return. But there almost certainly won’t be any tax to the estate for three reasons: First, as is explained above, due to the step-up in basis, there will be little or no gain to report in the first place. Second, the estate will be able to deduct some expenses, such as legal and accountant’s fees if they’re not already deducted on an estate tax return. Third, any taxable gain that remains may still be passed through to the beneficiaries.

      • Andy
        Reply

        Securities in a estate increased in value $$100,000 between the decedents passing and the sale of the securities by the estate executor. There are 11 beneficiaries and to divide the securities into 11 parties would not have been practicable.Who pays the tax on the gain? If it’s the estate, does the tax return have to be filed one year from date of death or at the years end? When can the proceeds be distributed to the beneficiaries?

          • Harry Margolis
            Reply

            Andy,
            The proceeds of the sale of the securities may be distributed at any time. At the end of the calendar year during which they were sold, you will have to file an income tax return for the estate. It will report the capital gain, but also deduct it since it will have been distributed to the beneficiaries. The estate will then issue each of the beneficiaries a k-1 reporting their share of capital gain, like a 1099 from a bank or investment firm. Each beneficiary will then have to pay the tax on their share of the gain, about $9,000 each.
            Harry

          • Pat
            Reply

            The gain on stock since my mother’s death is about $8,000. Can I simply sell the stock myself
            as executor withhold the tax, and distribute proceeds? Thanks

              • Harry Margolis
                Reply

                Pat,
                Yes, but that may or may not end up with the best tax result. Since the rate of tax on capital gains now is based on the taxpayer’s income, the estate may be a higher or lower rate than the beneficiaries. To further complicate the matter, an estate may have deductions it can apply against the capital gain. An accountant can analyze the situation and advise you on whether it’s better to pay the tax on capital gains at the level of the estate or to distribute them and have the gains pass through to the beneficiaries.
                All that said, the difference is unlikely to be huge. If the difference is 5%, that’s only $400, which may be what the accountant charges for the analysis.
                Harry

                  • Harry Margolis
                    Reply

                    Pat,
                    Allow me to supplement my response. I checked with an accountant how told me that in the final year of an estate the capital gains must flow through to the beneficiaries. So, for instance, if you sold the stock in 2022 and will be distributing out all the estate assets and filing a final estate income tax return in 2022, then the heirs must pay the capital gains on their shares of the proceeds. However, if instead the estate will stay open into 2023 and you won’t file the final return, then the options I described above are available.
                    I hope this helps clarify your choices.
                    Harry

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