How Much of Stock In Estate Should Be Sold to Pay Taxes and Bequests?
I am the executor of an estate where I would like to liquidate some common stock in order to pay the New Jersey inheritance tax and distribute some cash legacies as specified in the will. There is much more stock available than what I need to do this. Furthermore, I am the beneficiary of any residue in the estate. The stock has gone up in value about 20% since the death of the testator. Would you advise selling all the stock, or just enough to satisfy the above payments? Will there be a capital gain tax due, and if so, who will be responsible for it, especially the funds used to pay the tax bill?
I would advise selling just enough stock to pay the taxes and make the distributions. The capital gain realized on the sale will be allocated proportionately to the estate and to the beneficiaries. Here’s an example of how this might work:
Let’s assume the estate totaled $1 million, you had $10,000 of administration costs, and you had to sell $100,000 of stock realizing $20,000 of gain. Let’s further assume that you paid $20,000 in New Jersey inheritance taxes and distributed $20,000 each to four beneficiaries.
You would be able to deduct the $10,000 in costs from the income, reducing the taxable gain to $10,000. (Note that for estate taxes the personal representative has the option of taking the deduction for estate expenses on the estate tax return or income tax return for the estate, but not both. Since I practice in Massachusetts, which has an estate tax but not an inheritance tax, I’m not certain whether these can also be deducted from the inheritance tax.) Most of the remaining gain of $10,000 will be allocated to you since in our example you would receive 90% of the proceeds. So, approximately $9,000 would be allocated to you and $250 to each of the other beneficiaries.
The way this would work in practice is that the estate would report all the gain on its 1041 tax return, but then deduct the amounts attributable the beneficiaries. It would then issue a K-1 to each beneficiary reporting their share of the gain.