My Children inherited  million.  How should they handle it?

My Children inherited $5 million. How should they handle it?

My children have inherited $5 million in stock from their father (whose estate still hasn’t been distributed after 11 months) resulting in a 30% or so loss in value that they had no control over. Can they choose which stocks to sell and take tax losses? Their understanding is that the individual retirement account (IRA)’s 10-year withdrawal period has now been reduced to nine years, making it more taxing. Any help would be appreciated.

I am sorry to hear of his passing. I’m sure this is already a difficult time for you and your children, and I know that dealing with his unsettled estate and the issue of investment losses is no easier.

There may be a lot of complexities involved here that I’m not aware of because I don’t know all the details of the estate, but I’ll try to explain from a big picture perspective some things you should be aware of. that might help you decide how to proceed from here.

A financial adviser can help you make decisions about handling inheritance and minimizing taxes.

Talk to the Executor

What is known about inheriting stock.

What is known about inheriting stock.

First, I recommend that you speak to the executor of the estate and discuss any concerns you may have. There could be some issues that could help them resolve.

Not knowing anything else about the estate I can’t say if 11 months is a long time to wait for a settlement. Simpler estates can be settled more quickly than complex estates, while more complex estates take longer. If, however, you believe that the settlement is being delayed due to inaction or incapacity on the part of the executor, this must be addressed. That’s especially true if the delay is hurting your children financially.

Even if the delay is not due to anything within the executor’s control, knowing which stocks are best for your children to sell can help guide the executor’s decisions. Only the executor or an appointed court administrator has the authority to sell estate assets.

Inherited IRA distributions

Let’s also clarify their understanding of the inheritance IRA distribution rules. Assuming your children are not minors then, yes, under current law they have 10 years to withdraw any money held within inherited IRAs. Specifically, the money needs to be withdrawn by the end of the tenth year following the year of the original account owner’s death.

If their father died at any time during 2021, they have until December 31, 2031. If he died in 2020, they have until December 31, 2030.

Unfortunately, this clock starts when the original account owner dies regardless of how long it takes to settle the rest of the estate and distribute the assets.

Capital Loss Harvesting

It is not clear whether the particular stocks in question are held within the IRA or in another account. This is important when determining the tax consequences and whether or not the option is to carry losses.

  • If the stocks are held within the IRA, capital gains are already shielded from taxation. The flip side of that coin is that you can’t also deduct capital losses for tax benefits. The most important thing in this case is that the recipient will be taxed as income when a distribution is received from the IRA.

  • If the stocks are held within a taxable brokerage account, it’s a different story. In this case, capital losses can be used to offset capital gains. However, just because the value of the stock has declined by 30%, that does not guarantee that there will be no losses.

Make sure you check the fundamentals of the stock and understand if there are any unrealized losses to take.

Estate Taxes

If indeed the stocks are being held in a taxable account so that capital losses can be realized to reduce tax liability, and if capital losses are indeed to be realized, you still need to consider the best approach to remove those losses. If you sell the stocks while still holding them within the estate, the estate will receive the capital loss deduction.

That may or may not be the best approach. Although estates have a much higher tax rate than most taxpayers – between 18% and 40% – the vast majority of estates are not subject to taxation at all due to the current exemption amount of $12.06 million . It could very well mean that you take losses against an estate that has no tax liability anyway.

Distribution of Kinds

What is known about heritage stock.

What is known about heritage stock.

If instead, the estate transfers the stock to your children in kind, meaning the estate does not sell the stock but distributes the actual shares to them, their basis in the stock is more likely their fair market value on the date of their father. passed. This would be the case regardless of what their father paid them or what the basis of it was. This is called a stepped up base.

This may create a tax saving opportunity for your children. If the value of the stock has dropped 30% since their father died, there’s nothing they can do about it now anyway. If they take a distribution in kind, they may be able to sell and take the 30% loss, which they seem to have hoped to do in the first place.

Next Steps

I hope this provides some clarity and helps you think about your next steps. Estates can be very complex and tax rules are often very detail dependent. I strongly recommend that you speak with a team that includes an attorney, a tax professional and a financial planner who all have the necessary expertise to assist you.

Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers reader questions on personal finance and tax topics. Have a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Note that Brandon is not a participant in the SmartAdvisor Match platform.

Investment and Retirement Planning Tips

  • If you have questions specific to your investment and inheritance situation, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, get started now.

  • If you have a sizable estate, estate taxes can be very large. But you can plan ahead for taxes to maximize your family’s inheritance. For example, you can gift parts of your estate in advance to your heirs or even set up a trust.

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/Natee Meepian

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