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Question:

Is the best way to disburse stock 50/50 (2,000 shares) to my sister and myself? We are equal beneficiaries under our mother’s will. Should we cash it out deposit the proceeds into the estate bank account or split the stock holdings between us to do with them as we each wish? Which has the best outcome for taxes?

Response:

I almost always recommend simply selling the stock and splitting the proceeds because it’s usually easier than splitting and distributing the actual shares. There’s usually little or no tax consequence to taking this approach because the stock receives a step-up in basis upon the owner’s death. So the only taxable gain resulting from the sale would be due to appreciation in the value of the stock since then.

By way of example, Let’s assume your mother purchased the stock for $10 a share, that it was valued at $20 a share when she died, and today has a market value of $22 a share. Your mother’s $10 a share was her tax basis in the stock. If she had sold it for $20 a share, she would have realized taxable gain of $10 a share or $200,000. However, upon her death, the basis was adjusted to $20 a share, the so-called “step-up” in basis. So, if you sold the stock for $22 a share, you would realize just $2 a share of gain, or $40,000 split between you and your sister.

If you and your sister wanted to avoid or postpone this tax (since it will be due whenever you sell the stock) or if it is substantially larger than the amount in my example, you could split the shares between you. It will be a lot easier in your case than in many estates we see because there are just two of you. The most common way to do this is for you each to set up individual accounts with the same investment firm where the stock is held. Then your financial advisor should be able quite easily to split the shares between you, transferring half to each of your accounts. (We often run into trouble with this approach when there are several heirs and one doesn’t get their act together to set up the individual account, holding up the distribution for everyone.)

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