Should We Liquidate or Distribute Trust Investments after Grantor’s Death?
I am the trustee for mother’s revocable trust containing close to $500,000 in mutual funds, cash and some stocks. There are six equal beneficiaries. Should we liquidate the funds and distribute the proceeds or divide them and transfer the actual investments? The management company says we have to choose one method for all. Also, for the new EIN, what should be the origin of fund date, the original trusts funding date or my mother’s date of death?
The management company is correct. It’s definitely much easier to choose the same method for everyone. And it’s also easier to liquidate the holdings rather than to transfer them, especially with six different beneficiaries. If you liquidate the holdings and then distribute them, you can do so by writing checks or wire transfers. In contrast, the easiest way to transfer the actual investments is for each beneficiary to set up a personal account at the same investment company where the trust investments are held. We’ve seen estate distributions delayed because one heir never gets this done, which is one of the reasons we usually favor liquidation.
In terms of getting the new tax identification number (EIN), use your mother’s date of death. That’s the date on which the trust became irrevocable. That’s also the date the investment management company should use for valuing the tax basis for the investments. As a result of this step-up in basis, there should be little or no capital gains realized on their liquidation.
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I agree. My husband had to do this with his mother’s Trust; however, lucky for us, Fidelity Investments (where the bulk of the Trust was located) did all the work. My husband provided Fidelity with the list of her investments and Fidelity divided up the stock equally among the beneficiaries and distributed the stock. The only thing the beneficiaries did was provide their Fidelity account info (or create Fidelity accounts if they didn’t have them).
Yes, if all the beneficiaries are cooperative in setting up accounts at the investment house, it can be relatively easy to divvy up investments. The problem is that one uncooperative beneficiary can delay estate or trust distributions for everyone. Delay also almost always means extra legal and accounting expenses for the estate or trust. That said, each personal representative or trustee must decide how to proceed based on their assessment of which approach will meet the least resistance.
Hey Harry, thats solid avice.
To the tax question. I too, am the trustee for my mother’s revocable trust. Would it be more beneficial to set up a new EIN and invest from there, or just transfer the money to myself and invest as an individual?
It sounds like after your mother’s death you have the option of continuing the trust for your benefit or distributing out the trust property to yourself. Depending on the terms of the trust, continuing it might provide you with certain benefits such as creditor protection, but not if you have complete control over trust distributions. Just looking at taxes, it would certainly be simpler to liquidate the trust so you don’t have to file a separate trust tax return. In addition, trust tax rates accelerate much more quickly than individual rates, reach the top bracket of 37% at just $14,450 of income (in 2023). However, if you are already in a high income tax bracket yourself, continuing the trust could help you shelter the income below this threshold at lower rates. But if you are earning so much that you are already in a high tax bracket — the top rate for individuals (in 2023) starts at $539,900 of taxable income — then the meager tax savings by sheltering some income in the trust probably won’t make much of a difference to you.
So, I’d say, don’t keep your mother’s trust for any potential tax benefits. But if it provides other benefits, such as creditor or divorce protection, it may make sense to keep it intact.
Hi Harry. What if some stock has dropped significantly in value between date of death and when it’s ready to be distributed? If the estate has no other losses, wouldn’t it be better to distribute the stock itself to an heir who may be able to use the loss to offset other income? Or am I wrong in assuming that the estate’s basis would follow the stock to the heir?
The loss passes through to the beneficiaries whether the stock is sold by the estate or individually by the beneficiaries. However, an advantage of distributing the stock over liquidating it first is that the beneficiaries can each time the sale and the realization of any loss to get the best tax outcome individually. This is also true of any gain in the value of stock since the date of death. That said, usually there isn’t much gain or loss after the death of the grantor if the liquidation happens relatively quickly, meaning the tax consequences either way are likely to be minimal. However, with our topsy turvy stock market of late, the situation may be different.