Should Retirement Account Investments be Liquidated Upon the Owner’s Death?

 In Probate, Retirement Plans

Mathiew Stern on Unsplash

Question:

With respect to your recommendation that executors of estates or trustees of trusts sell stock holdings after the death of owner of the assets, what’s your recommendation for retirement accounts?

Response:

Retirement accounts after the death of the original owner should be treated differently from other investment assets for a number of reasons.

First, there are never tax consequences for selling appreciated assets within a retirement account; just upon distribution of retirement account funds outside of the account. As a result, it’s more likely that investments in such accounts have been traded during the owner’s life since there’s no capital gains tax cost for doing so. This means that, unlike standard investment accounts, retirement accounts are unlikely to be holding investments that the owner would, if it were not for the tax consequences, have sold long before.

Second, unlike probate or trust assets, the proceeds are not going to be liquidated and distributed to beneficiaries. Instead, the beneficiaries are likely to be named and to hold onto the accounts for some time in order to delay the tax consequences of withdrawal. Given that these funds will be held for some time, and that there should be little delay in the beneficiaries gaining control over the accounts, the beneficiaries should decide how they would like the funds invested.

The third reason retirement accounts are different, which parallels the reason two, is that the executor or trustee is unlikely to have control of the funds in any case. If the named beneficiaries are individuals, then they will have control over investment decisions for the accounts. If, on the other hand, the retirement accounts are payable to trusts, the trustee will have control and should decide how to invest the funds based on the time horizon of when they will be distributed, whether that’s 10 years for most inherited retirement accounts or longer when the beneficiary is a surviving spouse, minor child, or disabled individual.

The situation where retirement accounts should be treated like other assets and the underlying investments liquidated quickly is when there is likely to be a delay in the ultimate beneficiary or trustee gaining control for whatever reason. Then, it’s wiser for the person or institution in control to avoid the risk of a market decline by turning the investments into cash. But in most cases when there’s a delay, the delay also means that no one is in control and able to take action regarding the investments.

Showing 2 comments
  • Joan Kendall
    Reply

    Harry, Efhapisto-
    I am a Greek living in Hawaii/ from Peabody, Massachusetts of all places.
    Thank you for your terrific podcasts and articles. Really helps in this ever changing and often chaotic world.
    Joan

      • Harry Margolis
        Reply

        Joan,
        Thank you for your comments. There are a lot of people of Greek descent in Peabody, some of whom are clients.
        Harry

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