Should Appreciated Assets in Estate be Liquidated Before Distribution?
My mom passed in November 2018. I am the executor of her estate. She left an estate brokerage account that contains 2 mutual funds. The value of the funds has increased in the last 3 years from $171k (stepped-up cost basis) to $298k. This account is to be distributed between my niece (16 years old) and me. I know you usually recommend liquidating the stocks/mutual funds and distributing the cash. Since 3 years have passed and the investments have increased in value, do you still recommend liquidating the mutual funds and distributing cash or distribute shares to beneficiaries?
You are correct that my general recommendation for executors and trustees of revocable trust is to liquidate investments upon the death of the grantor. At that point the property has received a step-up in basis, so selling the investments doesn’t cause a tax on capital gain. By selling the property quickly, the executor or trustee does not risk being responsible for a drop in value on his or her watch. Further, it’s often easier to distribute cash than investments.
But this advice anticipates that the property will be distributed relatively quickly. If the responsible person knows that for one reason or other that distribution will be delayed, then the fiduciary should take the approach she would with any other short- or medium-term investments. This might entail keeping at least some of the funds invested in the market.
This worked out very well in your case given the stock market appreciation after a drop at the beginning of the pandemic. As a result, liquidating the mutual funds now could mean incurring more than $125,000 of capital gains (perhaps somewhat less to the extent some of the accumulation is from dividends and because there may have been some exchange of investments within the mutual funds with some of the capital gains already realized). So, in your case I’d divide up the mutual funds between your niece and yourself. This might be most easily accomplished by setting up personal accounts at the same financial institution where your mother’s investments are held.
Of course, there’s also the question of whether $150,000 should be distributed to a 16-year-old outright. You might transfer it into a transfers to minor account that would permit one of your niece’s parents or someone else you trust to manage the funds for her. Depending on the state’s laws, the funds would remain protected until your niece reached age 18 or 21. Also, if your mother had a will or trust, it might provide for holding the funds for her benefit until a later age, often age 25. This can be important both for protecting the funds and for financial aid purposes at college.