An inheritance may be coming soon

[ERD50]

Quote:

Originally Posted by AginMS I’m confused why the capital gains rate on $355K be more than 15% (up to $470,700) or at the very most 20% (on $470,700+)? Can you explain that for me? Thanks.

If the gains are retained in the trust, they are taxed at estate & trust rates, and short term gains are taxed at the income rate.

Income is taxed at 39.6% Over $12,500 on Trusts. And retained LTCG are taxed at 20% at that level. That can be a big difference on a large gains.

I still find SheitlQueen's wording confusing. You don't "have the option of the estate paying the capital gain taxes or paying them ourselves". This is clearer, IMO:

If you have realized gains/income in the trust, you have the option of distributing them in the trust's tax year, or retaining them in the trust to be distributed later.

If you distribute them in the trust's tax year, the individual pays taxes on them at their personal tax rate (they should receive a K-1).

If you retain realized gains/income in the trust, the trust pays taxes on them at their trust tax rate.

Yes, result is the same, but the cause should be made clear - it is "retained" versus " distributed" that determines how they are taxed. You don't just "have an option" of how they are taxed - it is the result of your action (or inaction).

All the sources I find are pdf's that don't copy/paste cleanly - here's one:

https://www.edwardjones.com/images/OPR-9806A-A.pdf

-ERD50

[AginMS]

ERD50,

Appreciate the reply and link. I had no idea estates and trusts were taxed that way - those rates are brutal at those income/capital gain amounts.

[RobbieB]

Yup. My attorney advised liquidating the trust ASAP for just that reason.

[ERD50]

Quote:

Originally Posted by AginMS ERD50, Appreciate the reply and link. I had no idea estates and trusts were taxed that way - those rates are brutal at those income/capital gain amounts.

Quote:

Originally Posted by RobbieB Yup. My attorney advised liquidating the trust ASAP for just that reason.

Just to be super-clear, those tax rates apply only to gains that are retained by the trust. As long as they are distributed, the person who received the funds will have the gains taxed at their own personal tax rate.

Distribution of principal should not be a taxable event.

So why liquidate a trust ASAP? If it no longer serves a purpose, sure. I think the only real downside is a little extra cost in preparing the tax forms, including issuing the K-1s (these document that the gains were distributed).

That is my understanding, I could be wrong and would appreciate correction on any points - but I'm pretty confident this is how it works.

-ERD50

[gayl]

Sorry to hear about MIL, tough times.

When mom died it was amazingly simple: FIDO needed 15 minutes, certified death cert, open account for each sibling. She (FIDO branch mgr) split everything in 5ths except 1 got an extra penny. (TOD / POD)

House was harder, took 2 days to find a WFB that would follow intent (poorly written trust) and 2 hrs there to fix it all.

Retained her old CPA to do all necessary forms as she passed in 2012 and house was sold 2013. Best 2k ever

DB did run it passed his firm's attny but he said we didn't need anything else. 2nd best ($250)

You get what you pay for

[Throwdownmyaceinthehole]

Quote:

Originally Posted by Another Reader IRA's should be distributed to the beneficiaries of record by the custodian.

And other accounts also. I have beneficiaries of record on all of my Vanguard accounts and my banking accounts. We previously had the beneficiaries as our trust, but changed all that to simplify. Only thing that goes thru our will is household goods and cars. House is in a Transfer on Death. OP needs to know who is listed as beneficiaries on MIL's accounts. Also my sister and I got life insurance proceeds as beneficiaries on my moms policies, and my brother did not. Insurance just required Death Certificate.
Also I can change the beneficiaries at any time, so OP needs to know if those have or can be changed by POA before MIL passing. Family issues can get messy.

[googily]

Quote:

Originally Posted by Badger I just received the monthly statement of account as summarized by BB&T financial advisors for her investments. There is no indication in the paperwork that she has an IRA. I don't believe she ever worked in the past 30+ years to have one. I think all of her investments are in taxable accounts. It just indicates the value of the accounts as in equities. It also indicates she has a revocable trust so does that mean this could possibly be distributed without a waiting period as you might for just a will? I'm thinking this might be an easy sale of equities and an easy distribution to the 2 children. There would be very little in debt other than the financial advisor bill. Each child should receive about $1M. Would there be any tax concerns for this size inheritance or would it be free and clear of taxes under these conditions? Cheers!

If they are just taxable accounts, the trust could be bypassed altogether if the accounts have beneficiaries listed. Unless the trust is the owner of the taxable accounts.

[Yarnstormer]

My experience when my mother passed was the iras that had beneficiaries were simply inherited and as others have stated have yearly RMDs based on my age.
Taxable accounts that were all in equities were divided up - then we each did what we wanted to rebalance them in a way more appropriate for our goals (or did not then complained later)
The basis was the value of the stock on the day Mom passed and the stock market wasn't booming at the time so the gains were minimal.

One thing I'd warn you about. I inherited a house from my Mom. I did not want to live there anymore since she was gone - no reason to be in that area of town. I took a year to get it ready and sold. In that year, housing prices increased. Because I had NO appraisal when the house was inherited the only value I had to use was a tax assessors value which was of course low. So, it looked like I had gains when I did not. I did not "own" and live in the house for the number of years necessary to avoid being taxed on gains. If there is a house in question be sure and get a value on it asap.

[Newventurer]

Quote:

Originally Posted by Yarnstormer My experience when my mother passed was the iras that had beneficiaries were simply inherited and as others have stated have yearly RMDs based on my age. Taxable accounts that were all in equities were divided up - then we each did what we wanted to rebalance them in a way more appropriate for our goals (or did not then complained later) The basis was the value of the stock on the day Mom passed and the stock market wasn't booming at the time so the gains were minimal. One thing I'd warn you about. I inherited a house from my Mom. I did not want to live there anymore since she was gone - no reason to be in that area of town. I took a year to get it ready and sold. In that year, housing prices increased. Because I had NO appraisal when the house was inherited the only value I had to use was a tax assessors value which was of course low. So, it looked like I had gains when I did not. I did not "own" and live in the house for the number of years necessary to avoid being taxed on gains. If there is a house in question be sure and get a value on it asap.

Any danger of getting an appraisal in a falling market and having that used against you? I don’t know if an appraisal somehow becomes discoverable or prior knowledge gives one (perhaps and honest one) more exposure to possible downside?

[akck]

Quote:

Originally Posted by Badger I just received the monthly statement of account as summarized by BB&T financial advisors for her investments. There is no indication in the paperwork that she has an IRA. I don't believe she ever worked in the past 30+ years to have one. I think all of her investments are in taxable accounts. It just indicates the value of the accounts as in equities. It also indicates she has a revocable trust so does that mean this could possibly be distributed without a waiting period as you might for just a will? I'm thinking this might be an easy sale of equities and an easy distribution to the 2 children. There would be very little in debt other than the financial advisor bill. Each child should receive about $1M. Would there be any tax concerns for this size inheritance or would it be free and clear of taxes under these conditions? Cheers!

First, check to see if beneficiaries/TOD have been placed on the accounts as I believe they’ll supersede any will/trust designations. If that’s the case, you can get the funds quickly. Also, she may have inherited an IRA. If this is not true, as mentioned, work to sell the equities ASAP to reduce taxes with the stepped up basis (not necessary with IRAs). I believe that the executor can make distributions once they are established. Distributions will be free at the federal level, but check at the state level.

[Badger]

MIL passed away last night.

[kaudrey]

I'm so sorry for your loss. Prayers to you and your family.

[gayl]

I'm so sorry for your loss

[Yarnstormer]

I'm sorry for your loss. My best to your family.

[Badger]

Thank you for the condolences. This has been really rough for my wife and I to watch her slowly decline and have to fight for her health, safety, and comfort these past few years.

I spoke with the brother (trustee) yesterday and mentioned there may very well be a loss (possibly substantial) in the inheritance before he begins the distribution. His response was the market it great and has only been doing well in the past year unlike the previous 7years.

I wish there was some way to speed up the distribution instead of having to wait on him to do his responsibility. He is the antithesis of "live below your means" and has no knowledge of stock market or investing since he has never saved any money and will now cost his sister because of his arrogance and lack of experience/knowledge.

He is unwilling to consider anyone's suggestions since he thinks the market is going to continue an upward trend in the near future. He must have the crystal ball everyone is looking for. It looks like there is nothing that can be done unless someone here knows of a way around this.

Cheers!

[MichaelB]

The Trustee has a fiduciary obligation to ensure the safety of the trust assets. He is not at liberty to speculate with them. He should provide an accounting of all the assets as of the date of the Grantor's passing and preserve their current value.

The cost basis of those assets resets on the date of passing, and any subsequent change in value represents a potential tax liability for the beneficiaries. The trustee must be aware of this and really shouldn't be engaging in transactions that affect the heirs without their agreement. At this point, moving everything into interest bearing accounts makes sense.

[ERD50]

Quote:

Originally Posted by MichaelB The Trustee has a fiduciary obligation to ensure the safety of the trust assets. He is not at liberty to speculate with them. He should provide an accounting of all the assets as of the date of the Grantor's passing and preserve their current value. The cost basis of those assets resets on the date of passing, and any subsequent change in value represents a potential tax liability for the beneficiaries. The trustee must be aware of this and really shouldn't be engaging in transactions that affect the heirs without their agreement. At this point, moving everything into interest bearing accounts makes sense.

+1 on everything. If the trustee wants to speculate, he needs to get the money distributed, and then he can do with his share whatever he wants. He is not authorized to speculate on behalf of others, against their wishes.

It sounds like beneficiaries are just him (Trustee), and your wife? If that's the case, you don't have any support from other beneficiaries. I suppose your recourse is to point out some articles that explain the responsibility of a Trustee, and see if that shakes him up and gets him to fly straight. After that, actual legal (or threat of) action?

But hold on - you said "mutual funds"? Do you actually know what the overall AA is? Is it very different from what your wife would chose? Maybe its a moot point?

-ERD50

[Badger]

Thank you for the replies. What you have posted is exactly what was done when my parents passed away. Unfortunately BIL is difficult to work with.

I sent an email with an explanation of what you have posted as being the proper method to handle the inheritance (put the money in an interest bearing account, etc.) We will see how he handles his fiduciary responsibility and how efficiently it is carried out.

The portfolio consists of what appears to be 8 stocks and 1 small MM account for everyday expenses.

I would have thought it would have been easy enough to contact the Financial Advisors who handle the equities and have them make the transfer of equities to the MM account.

I was thinking of going to the FA today with my wife to see what has been done since her brother is always slow to respond.

Cheers!

[ERD50]

Quote:

Originally Posted by Badger ... I was thinking of going to the FA today with my wife to see what has been done since her brother is always slow to respond. Cheers!

I suppose it couldn't hurt to talk to the FA of the account, and let them know your (wife's) concerns as a 50% (I think that's the case) beneficiary.

I'm not sure if there is any legal standing there, they probably see their job as doing what the Trustee asks of them. But I think they would also see that what you are asking is the correct thing to do, and maybe they will just talk some sense into BIL. Maybe coming from them will have more impact, especially if they point out BIL has an actual legal responsibility here.

Heck, why not sell off half the stocks if nothing else, put them and half the MM in a separate MM until distribution can take place? He also should be able to distribute the majority of it now, and hold back just enough to settle any bills that may come up (how much to hold depends on the clarity of the situation).

-ERD50

[MichaelB]

Quote:

Originally Posted by ERD50 I suppose it couldn't hurt to talk to the FA of the account, and let them know your (wife's) concerns as a 50% (I think that's the case) beneficiary. I'm not sure if there is any legal standing there, they probably see their job as doing what the Trustee asks of them. But I think they would also see that what you are asking is the correct thing to do, and maybe they will just talk some sense into BIL. Maybe coming from them will have more impact, especially if they point out BIL has an actual legal responsibility here. Heck, why not sell off half the stocks if nothing else, put them and half the MM in a separate MM until distribution can take place? He also should be able to distribute the majority of it now, and hold back just enough to settle any bills that may come up (how much to hold depends on the clarity of the situation). -ERD50

The FA probably can’t discuss this account with anyone except the authorized representation, and trying to contact the FA might alienate the BIL.

Asking the BIL to segregate the assets and move one share into an interest bearing account might work. Until the assets are distributed they belong to the trust, so that segregation is not enforceable, but it might help.

Suggesting, or requesting, a partial distribution now is another good idea worth pursuing IMO.