Should Executor Sell Stock in Estate or Distribute Shares to Beneficiaries?
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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?
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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?
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.
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?
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
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
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
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
Hi Harry, My sister and I are the executors or my late mothers estate. She had some stock and she left percentages to all 4 children. Can we sell the stock and divide it out? My brother wont make a decision on what he wants to do with his portion. The others moved their stock into their brokerage firm. My brother doesnt have one and he wont tell us to sell it. Legally can we just sell his 10 % of her stock for him and send a check? Thanks in advance.
Stefne,
Yes, you can sell the remaining stock and send the proceeds to your brother. But it does get a bit complicated which is why we usually suggest selling all the stock in an estate and distributing all the proceeds to the beneficiaries, especially in your case where there’s one hold out in setting up brokerage accounts. If the stock dropped in value since your mother’s death, which is quite likely this year, will your brother make a claim that he should have received 10% of the date of death value, especially since he won’t be deciding when it’s sold? If it went up in value, who will pay the taxes on the capital gain, the estate or your brother?
I think you have a good response should your brother raise these arguments since he had the option of receiving the stock directly and determining these issues himself and chose not to go along, leaving you and your sister no alternative. That’s why I say you should go ahead with your plan. But if you had treated everyone the same, then it would be more difficult for anyone to raise any objection.
Harry
Your response seems to contradict what you wrote in your 06/21/2021 “Ask Harry” column re: “the property may not receive a step-up in basis upon death because it’s in trust.”
I’m sure there’s some nuance I’m missing here, but what is it?
Dean,
I”m not finding that column. I did find this one posted on 6/21/2021, which is consistent with the above in terms of step-up in basis: https://askharry.info/as-trustee-should-i-distribute-investments-or-liquidate-them-to-distribute-cash/ The difference may have to do with the type of trust discussed in the post from which you quote. Some irrevocable trusts are completed gifts when funded, in which case they are not included in the grantor’s estate and do not receive a step-up in basis upon their death.
Harry
I am the executor of an estate where I need to liquidate common stock in order to pay inheritance tax and pay out cash bequests (legacies). Any residue remains the property of the executor (me). The stock has appreciated around 20% since the death of the testator. Who will be responsible for the capital gains, and should I sell just enough stock to fulfill the above requirements and hold on to the rest? Thanks
Bob,
The responsibility for the capital gains will be split proportionately between the estate and heirs. The estate will have to file a 1041 income tax return and report the capital gains. It will then deduct its expenses, such as legal and accounting fees, and the proportionate share of the capital gain passing to the beneficiaries. The estate will issue k-1s to the beneficiaries reporting the gains attributable to each of them and they will report them on their tax returns. Here’s an example of how this might work:
Let’s assume that you sold $100,000 of stock and realized $20,000 of gain. Let’s also assume that your deductible expenses totaled $10,000 for the year, the inheritance taxes totaled $10,000 and you distributed $20,000 each to four beneficiaries. The estate would then have realized $10,000 of taxable gain (the $20,000 of gain less $10,000 of deductible expenses). This would be attributable in equal shares to the estate and each beneficiary, with each reporting $2,000 of capital gain and paying taxes accordingly.
Finally, as to your last question, you can delay paying taxes on your capital gain by having the remaining stock retitled in your name. The gain will not be realized until you sell the stock. However, don’t let the tax tail, wag the investment dog. In other words, in the long run, you’re probably going to be better off following the right investment strategy whether or not that means selling some of the stock and realizing the capital gains now rather than later.
Harry
Does a beneficiary to a estate in California have to sign a receipt before receiving their share of cash and in-kind stocks?
I was first asked to sign a receipt that said I had already received my share of cash and in-kind stocks. I asked the lawyer’s staff to change it to read upon signing and returning this receipt. I also asked them to add the name and share amount of the stocks I am to receive, along with the dollar amount of the cash am to receive. They did change the I have received part to Upon receiving etc.. but never the other requests. That was 6 months ago, all others beneficiary’s have received their monies and in-kind stocks. Now my brother is pushing me to sign. He says if I don’t they are going to go to court and have the court sale my stock share and just mail me a check for my share. My brother has left me a voice message saying they may just use some of my cash to pay some upcoming estate taxes. I don’t want my stock share sold but I also don’t want to sign the receipt as is. My financial advisor said that if I signed it they could give me a dollar and or one or two shares of stocks. The receipt even has a blank where the dollar amount should be. The receipt reads as though I wrote it, even though the lawyers staff is not respecting my requests by adding them. Does one have to sign a receipt (with blanks and no share amounts and or names of stocks to be given) in order to receive their inheritance ? I just want my share.
Susan,
I can’t tell you about California in particular, but it’s probably no different from other states in this regard. You’re dealing with two conflicting rights here. You have the right to receive your share of the estate whether or not you sign a receipt. The personal representative of the estate has the right to be relieved of potential liability for properly carrying out their duties. There are a couple of ways they can do this. They can receive a receipt from the beneficiaries for receipt of their distributions, often including a release as well. Or they can seek court approval of their actions. The latter approach generally takes more time and costs more for the estate, due to the attorney time preparing the appropriate papers and appearing in court to obtain its approval.
Further, while you’re entitled to your share of the estate without signing a receipt or release, you are not entitled to receive your distribution in stock as opposed to cash. That’s ultimately up to the personal representative to decide on the most efficient way to distribute the estate assets.
So, while you’re not required to sign the receipt, unless you feel the personal representative has done something wrong which you would like to challenge in court, or has not been entirely transparent, which they would have to be if they sought court settlement of the estate, the path of least resistance would be to sign the receipt.
Harry
What about stock that is a result of NUA? There is a brokerage account that is in a Conservator account (FBO the original stock owner) that was the result of a NUA rollover. The approximate value of the stock is $470,000, but the basis is only around $100,000 (this is the NUA basis, so no step up). The owner has now passed, so the shares will go to a brokerage in the name of the estate (no individual beneficiaries listed). Can the executor of the estate then “gift” shares to the ultimate beneficiaries who can then decide when it is prudent to sell the stock and realize the l/t gains versus cashing the shares out and having the estate pay the tax?
Anthony,
I’m sorry, but this is outside my expertise. I’d recommend consulting with the investment firm managing the retirement plan.
For other readers, NUA refers to net unrealized appreciation in company stock held in a 401(k) account with that company. While most retirement plan withdrawals are subject to ordinary income tax rates, withdrawals of NUA can be subject to the usually lower long-term capital gain rates.
Here’s an article on the Fidelity Investments website on the topic: https://www.fidelity.com/learning-center/personal-finance/retirement/company-stock
Harry
Hi Harry,
This might have been answered above but I didn’t quite get it. If an estate owns lots of stocks and sells them,
I undersand there is a step up in basis and so the estate pays capital gains only on the difference in the price the day it is sold and the price the day the person in question dies. As executor, I would like the estate to take care of and pay all of the taxes so that I can just in the end send cash to the beneficiaries. Can I do this in such a way that the beneficiaries do not have to deal at all themselves with capital gains and do not need to receive or deal with a k-1 reporting? After all, they are just receiving cash and the estate itself has by then taken care of any capital gains taxes and issue.
Thanks, Jeff
Jeff,
To be honest, I’m not totally certain of the answer because we always refer estate income tax returns to accountants. But I see no reason conceptually that the estate couldn’t pay the tax on any capital gains that may result from the liquidation of stock holdings.
Harry
How are inherited stocks, not held in a brokerage account, sold by the executor and cash proceeds distributed? Specifically, what are the sale transaction mechanics?
Mike,
Once the executor has received their appointment from the appropriate probate court, they bring that to the brokerage firm and fill out the various forms required by the company to put the account in the estate’s name. Depending on the number of hurdles they impose, this could take anywhere from a few days to a few months. Once you are on the account, you can sell the stocks just as you can stocks in your own brokerage account.
Harry
Hi Harry,
The executor of the estate is valuing the assets at the alternative valuation date (6 months after date of death). The assets include properties, stocks/bonds, and a business. As I am inheriting the stock/bonds, he told me to use the alternative valuation date as my cost basis. However, as the stocks/bonds were not distributed to me till 5 months after the alternative valuation date and have gone up significantly in value, he wants to value my share of the estate as of the date of distribution. Seems like in that case the estate should pay for the capital gains from the alternative valuation date to the date of distribution and my cost basis should be the value on the date of distribution. Am I on the right track?
Thank you so much!
Julie,
Probably not. The estate used the option of the alternate valuation date in order to reduce the estate tax. (For any readers who don’t know about this option, under IRS rules if the value of an estate has declined since the decedent’s death, the estate can pay taxes based on its value six months later instead of the date-of-death value of the estate.) However, the values listed on the estate tax return become the new tax basis for purposes of determining capital gains. Capital gains are the difference between the proceeds on the sale of assets and the basis, so if the basis is lower due to having used the lower value for the estate tax return, this will result in a higher tax on capital gains when the property is sold. Under the IRS rules, the basis must be the value on the estate tax return and is not affected by the value on the date of distribution.
But you raise two other questions. The first is whether you should be compensated for the potential tax on capital gains you may incur in the future. The answer is no. First, it’s not clear that you have been damaged in any way. The estate saved money on the estate tax return which presumably benefited all the beneficiaries, including you. It’s hard to evaluate ahead of time what tax on capital gains you may incur since we can’t know when or if you will sell the assets, what the value will be at that time, and what your tax rate will be.
Your last question is more complicated and may depend on how your share of the estate is determined. If you are receiving a fractional share of the estate, then it seems that valuing your share on the date of distribution makes sense because presumably the same method will apply to all the beneficiaries of the estate. It would be unfair to treat any single beneficiary differently from any others. However, if you are entitled to a fixed sum, then the distribution of assets to you rather than cash does not seem fair. In that case, the estate should liquidate the assets and simply pay you cash so you are not burdened with possible future taxes on capital gain.
I expect that these are not the answers you were seeking, but I hope they’re helpful.
Harry