Designated Beneficiary Charles Schwab Taxes

[B-Guy]

I'm trying to understand what our designated beneficiary tax liability is.

My DW was a 1/4th designated beneficiary for an account from her DM at Charles Schwab. The funds were put into the Schwab account that were obtained from a settlement from a auto accident. I'm trying to understand what the tax implications are. We have conflicting information. One said the original amount is not taxable and the other said the entire account is taxable.

Does anyone know which is correct or what we need to ask to verify the tax implication.

 

[GrayHare]

It probably depends on how the settlement classifies the funds.

 

[pb4uski]

From what you wrote it sounds like your DMIL received a lump sum settlement from an auto accident that was deposited in a Schwab account and the DMIL passed and your DW was a beneficiary of 1/4 of that account.

It is not a taxable event to your DW. In fact, if the Schwab account includes appreciated securities then DW gets a stepped-,up basis.

The settlement may be taxable on DMILs final return, but probably not.

When did your DMIL receive the settlement? If prior to 2023, then it might be that the taxability question has been answered.

 

[target2019]

Assuming this is a taxable brokerage account (not retirement like Roth or IRA), this is what my wife experienced as a 1/4 designated beneficiary.

The 12 mutual funds and individual stocks received a step-up in cost basis. You can find reliable sources for that on the internet. In our case it was not instantaneous. But after a week I clicked at the far-right of a holdings line in the account, and saw that I could see the shares basis had been adjusted. Roughly speaking, if yesterday's fund price close was $50, the basis for all lots was adjusted to $50. If you sell that holding, then you will see very little gain or loss, and around $50 cash in the settlement account. So, there is little or no tax to be estimated.

Under ordinary circumstances, you owe no taxes. So it is your SELL action that triggers a gain or loss, not the transfer of the account in wife's name.

Be sure to examine each holding for appropriateness. I was fine with most of the individual stock holdings. However, the dozen mutual funds were high expense and not optimum for a taxable account. All of those were soon sold after I confirmed the cost basis adjustment was made for each mutual fund.

I think you're saying this was a Schwab account previously. If so, I think it is likely that all cost basis information will be handled correctly by Schwab. But now you have more background, and can monitor the account for correctness.

The original settlement was not taxable, FYI. It came as a check, and was deposited to the Schwab(?) account. Then someone picked investments (or didn't).

You should also know that the Schwab settlement account pays little interest. So any cash there should be invested according to your investment plan. Most investors mention SWVXX money fund as what they use for necessary cash to pay bills, etc.

Note that I am just an anonymous person on the internet, and YMMV. Always find a source for what should happen, and understand that other situations can occur.

 

[target2019]

To address what has been told to you, both statements can be correct.

You inherited assets and they now sit in a *taxable* brokerage account. But everything is not taxable on the day the cost basis is adjusted.

As time goes on you may see dividends and other income generated, and you'll receive a consolidated 1099 next year which has details on all transactions, losses, etc.

So, what you heard was correct in both cases, but a little incomplete in the description.

"She inherited about $50,000, and the amount was not taxable. However, during the year the investments generated some income, which were taxable." How's that?

 

[B-Guy]

I appreciate what you have shared and I’m understanding better.

To help clarify a few things, hypothetically the settlement from the accident was $400,000 in 2017. My DMIL passed in September 2023. At that point the account had grown to $600,000. My DW received her 1/4th share as one of the designated beneficiaries of $150,000 in February 2024.

If I understand correctly there should be no tax liability on my DW’s account, at least until the date my DMIL passed or possibly from when my DW received her share in February. Am I correct?

 

[B-Guy]

One thing to add, I noticed was that the statement shows DESIGNATED BENE PLAN/TOD if that helps.

 

[cathy63]

I appreciate what you have shared and I’m understanding better.

To help clarify a few things, hypothetically the settlement from the accident was $400,000 in 2017. My DMIL passed in September 2023. At that point the account had grown to $600,000. My DW received her 1/4th share as one of the designated beneficiaries of $150,000 in February 2024.

If I understand correctly there should be no tax liability on my DW’s account, at least until the date my DMIL passed or possibly from when my DW received her share in February. Am I correct?

This is a bit confusing because the distribution occurred in a different year than the death of the original owner, and the tax situation depends on what happened in Q4 and how the brokerage that holds the account reported things to the IRS.

If the broker reported the entire 2023 income (interest, dividends, proceeds from sale of investments) under your MIL's social security number on a single 1099, then whoever files her final return should deal with it as if it were all her income and report it on her own tax return. Technically I thiink the estate should report the Q4 income as a nominee and issue 1099s to all four beneficiaries, but I would never recommend that. That's a lot of work, and it's extremely unlikely that the IRS would ever have questions about this, so just put it on MIL's return if that's what the broker did.

If the Q4 income was reported under a trust's or the estate's EIN (this shouldn't happen since it was a TOD account, but you never know), then whoever is executor/trustee should be issuing a K-1 and telling you how much your share of the income was. This will probably not happen by April 15, so you would need to file for an automatic extension and then file your final return by October 15.

 

[B-Guy]

Thanks again for your help!

I’ve done well investing but I’m not so great at understanding taxes. I did find out that 35% of the current value is shown as “Unrealizes”. Does this mean the 35% has tax liabilities? We live in a very rural area and have limited access to the kind of tax advisor that I did in the “Big City”.

 

[cathy63]

Thanks again for your help!

I’ve done well investing but I’m not so great at understanding taxes. I did find out that 35% of the current value is shown as “Unrealizes”. Does this mean the 35% has tax liabilities? We live in a very rural area and have limited access to the kind of tax advisor that I did in the “Big City”.

Has it gone up 35% in value since your MIL died? If yes, and it's not an inherited IRA or inherited Roth IRA, then that 35% has a tax liability. That doesn't seem very likely, but it's possible your MIL had invested in something that's gone way up in the last 5 months. It's impossible to say with the info you have provided so far.

What you really have to do is look at each holding separately. Look at what they say is the cost basis per share. Then you do some research. Go to finance.yahoo.com and plug in the symbol for that holding. Look at the historical prices for the date your MIL died and the date in Feb when the account was transferred to your DW. Is the cost basis accurate for at least one of those dates? If not, then your DW needs to get on the phone and call Schwab (this account is her separate property so they probably won't talk to you directly, but may if she gives them permission) and ask some questions about how they determined the basis.

Do not just assume that Schwab did everything correctly when it comes to step-up of basis. I have seen several brokerage statements where somebody screwed up on revaluing one or more of the assets after a death. If they did it wrong, then they will correct it but someone has to tell them there's an error.

If you don't want to call Schwab, then if you could give us an actual example of one stock or mutual fund that's in the account and all the numbers you can find on the statement for that holding, we could try to help you understand it better.

 

[B-Guy]

Thanks for the homework! I'm a hands-on person, and enjoy this opportunity.

I appreciate what you all have contributed to me bettering my understanding of our situation. It would be easy to just get Schwab involved, and will if and/or when we need to, but if I can go into the conversation with a broader vocabulary and better understanding ahead of time the better off we will be.

I preferer to be hands on and the only way that will happen is if I get a better understanding of how this all works.

 

[Texas Proud]

I have not researched this to know if you can do this if no estate tax filed...


But, there is an alternative date you can use... 6 months...



Look it up... found this..



When an individual dies, the executor is faced with an important decision that has the potential to impact the taxes owed by the estate and its heirs. The executor will have the option of valuing the estate on the date of death, or alternately, on the six-month anniversary of death – the latter is, fittingly, referred to as the "Alternate Valuation Date

 

[B-Guy]

Ok, so I ran all the numbers and there is 8.78% increase as of Friday gain sense TOD. So if I'm understanding this correctly there should only be tax liability from TOD until sold. I'm I correct?

 

[cathy63]

Sure. If that's what your numbers are telling you and that's also what Schwab's numbers are telling you, then that's probably the right number.

If Schwab's numbers (the ones you see when you login and view the account on their website) say something different, like the previous 35% you mentioned, then that's a problem and you need to ask them the questions I suggested back in post #10.

Inherited assets are always treated as if they were held long term, so in whatever year you sell the assets you will have a long term capital gain or loss to report on your tax return.

 

[target2019]

Ok, so I ran all the numbers and there is 8.78% increase as of Friday gain sense TOD. So if I'm understanding this correctly there should only be tax liability from TOD until sold. I'm I correct?

Still correct.

However:

Did the cost basis update as it should have?

Is there any income shown in the history for this year so far?

Was anything liquidated from the old account as it transferred to you? Let's say the old account held something that could not be transferred in kind. In that case the investment was sold, and you'll see cash transferred.

 

[B-Guy]

After all your helpful posts giving me a better understanding of what to ask. I was finally able to ask the correct questions get the information about tax liabilities.

In our case we are will be taxed on the gains from DOD (September 2023). Now we can move forward with a better handle on our tax liabilities.

Thank you for all your help, it was greatly appreciated.

 

[Dash man]

Check the rules for inheritance taxes in her state. Some states have low exclusions for inheritance taxes.