My kids inherited $5 million worth of stock from their dad (whose estate has yet to be dispersed after 11 months) leaving them with about a 30% loss in value that they don’t have no control. Is there a way for them to choose which stocks they should sell and reap tax losses? According to their understanding, the 10-year Individual Retirement Account (IRA) withdrawal period is now reduced to nine years, making it even more taxing. Any help would be appreciated.
I am sorry to learn of his death. I’m sure it’s already been a difficult time for you and your children, and I know that dealing with your unresolved estate and the issue of investment losses isn’t making it any easier.
There are potentially 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 broad perspective some things you should be aware of. it might help you decide how to move forward from here.
A financial advisor can help you make decisions about managing an inheritance and minimizing taxes.
Speak with the executor
First, I recommend that you speak with the executor and discuss your concerns. There are several potential issues that this can help resolve.
Without knowing anything else about the estate, I can’t say if 11 months is a long time to wait for the settlement. Simpler estates can be settled more quickly than complex estates, and more complex estates take longer. If you believe, however, that the settlement is delayed due to the inaction or inability of the executor, this must be resolved. This is especially true if the delay is causing financial harm to your children.
Even if the delay isn’t due to anything within the executor’s control, knowing which stocks your kids would rather sell can help inform the executor’s decisions. Only the executor or an appointed administrator has the power to sell the assets of the estate.
Legacy IRA Distributions
Let’s also clarify their understanding of the distribution rules inherited from the IRA. Assuming your children are not minors, then yes, under current law they have 10 years to withdraw any money held in inherited IRAs. Specifically, the money must be withdrawn before the end of the tenth year following the year of the death of the original account holder.
If their father died sometime in 2021, they have until December 31, 2031. If he died in 2020, they have until December 31, 2030.
Unfortunately, that clock starts when the original account holder dies, regardless of how long it takes to settle the rest of the estate and distribute the assets.
Collect capital losses
It is unclear whether the particular shares in question are held in the IRA or in a different account. This matters when it comes to determining tax ramifications and whether or not harvesting losses is an option.
If the shares are held in the IRA, the capital gains are already tax sheltered. The flip side is that you can’t reap capital losses for a tax benefit either. What matters in this case is simply that when a distribution is received from the IRA, it will be taxed as income for the beneficiary.
If the shares are held in a taxable brokerage account, that’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 dropped by 30% does not mean that there are actually losses to be had.
Make sure to check the stock basis and understand if there are any unrealized losses to take.
If the shares are in fact held in a taxable account so that capital losses can be reaped to reduce tax payable, and if there are in fact capital losses to be reaped, you should always consider the best approach to reaping these losses. If you sell the shares while they are still held in the estate, the estate will benefit from the capital loss deduction.
This 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 tax at all due to the current exemption amount of $12.06 million. This could very well mean that you are reaping losses on an estate that doesn’t have to pay taxes anyway.
Distribution in kind
If instead the estate passes the shares to your children in kind, meaning the estate does not sell the shares but distributes the actual shares to them, then their basis in the shares is most likely their fair market value at the date their father passed away. This would be the case regardless of how much their father paid for them or what his basis was. This is called a reinforced base.
This potentially creates a tax saving opportunity for your children. If the stock’s value has dropped 30% since their father died, there’s nothing they can do about it now anyway. If they accept the in-kind distribution, they may be able to sell and reap the 30% loss, which they were hoping to do in the first place.
I hope this brings some clarity and helps you think about your next steps. Estates can be very complex and tax rules are often based on minor details. I strongly encourage you to speak with a team that includes a lawyer, a tax specialist and a financial planner who all have the expertise to help you.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers readers’ personal finance and tax questions. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question might be answered in a future column.
Please note that Brandon does not participate in the SmartAdvisor Match platform.
Investment and retirement planning advice
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 connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
If you have a large estate, inheritance tax can be high. But you can plan ahead for taxes to maximize the inheritances of your loved ones. For example, you can give portions of your estate to heirs in advance or even set up a trust.
Photo credit: ©iStock.com/PeopleImages, ©iStock.com/Natee Meepian
The message Ask an Advisor: My Kids Inherited $5 Million. How should they handle it? appeared first on SmartAsset Blog.