Step-up in basis

Question:

I am successor trustee for my mom’s living revocable trust. Her trust assets are currently held in a brokerage account in the form of stocks and mutual funds. After her death, my aim is to distribute trust assets to beneficiaries in the form of cash, keeping the process as simple as possible and keeping taxes to a minimum. Should I sell all trust holdings as soon as possible after she passes, thus taking advantage of the step-up in basis and keeping capital gains near zero?

Response:

Yes, that’s definitely the simplest way to handle the stock holdings. Given the step-up in basis, there will be little or no capital gain and you do not risk a downturn in the market adversely affecting everyone’s inheritance.

For readers who are unfamiliar with capital gains and the step-up in basis, here’s a short primer: Capital gains are the difference between the selling price of stock (as well as other assets, such as real estate) and its basis. The basis starts out as the purchase price. So, if you purchased a share of stock for $100 and sold it for $200, your gain would be $100 ($200 – $100 = $100). This gain is then taxed at capital gain tax rates of zero to 20% depending on the taxpayer’s overall income. (That’s the federal rate; there may also be a state tax.) When an owner of stock dies, if the value of the stock has increased, then the basis is adjusted to the market value on the owner’s date of death. So, if in our example, the value was $150 upon the death of the owner, this would be the new basis. If the stock was then sold for $200, the gain would be $50 ($200 – $150 = $50).

In your case, if you sell the stock as soon as possible after your mother’s death there will likely be little or no change in the value of the stock and, thus, little or no gain to be taxed. In addition, it will also be much easier to distribute the trust proceeds as cash than if you were to try to split up the stock holdings and distribute them. The delay caused by the latter approach could be risky since no one would be managing the investments during the process.

As a final note, this is one of the advantages of using a revocable trust. You can obtain control over the trust assets more quickly than if the stock were in your mother’s name alone, in which case you would have to be appointed personal representative by the probate court before you could act. You would be able to move even faster if instead of being successor trustee, your mother named you as co-trustee. That way, you would go through the process of being added to your mother’s trust accounts while she’s alive rather than after her death. Some investment firms and banks make this a bit of a cumbersome process.

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Should Executor Sell Stock in Estate and Distribute Proceeds? Should Executor Sell Stock in Estate or Distribute Shares to Beneficiaries? As Trustee Should I Distribute Investments or Liquidate them to Distribute Cash?