Estate Account Stock Distribution

[bpgdeg1234]

Hello Folks,

Thanks in advance for any perspectives on this headache.

DW is Executrix of Father's Estate and has the shares of 2 companies in an Estate Brokerage account to distribute to her and her 3 siblings. Based on input from several sources I tried my best to convince DW to simply sell the shares and distribute the cash proceeds since it would be very difficult to get everyone to agree with creating a personal brokerage account at the particular firm for those who just want to sell their portion.

Well the pain has been real and intense as although we had them convinced at first somehow one, then another, decided they wanted to keep the shares while the remaining beneficiary is steadfast in not wanting anything whatsoever to do with creating a new account at the brokerage and wants DW to simply sell his portion of the shares out of the Estate.

In heeding to Gill's counsel from Boglehead's forum we have been clear it is "All or Nothing" but apparently DW is waffling a bit as she has been trying to rebuild a relationship with one of the siblings that wants to keep the shares so is considering moving forward with their wishes in agreeing to have them opening up personal brokerage accounts for her to instruct the brokerage to have their respective 25% journaled into. What to do with the disposition of the remaining beneficiary 25% is the question.

As I understand it, if DW proceeds with just selling the remaining beneficiary shares out of the Estate account and distributes those proceeds to the beneficiary (which includes say $6000 in capital gains) then the accounting will get messy with the Estate 1041/K-1 pro rata distribution of capital gains, commission, etc. going to all 4 of the beneficiaries come tax time (even those who had their shares transferred in-kind to their own personal account) would receive 25% each of those capital gains from the Estate.

As such, DW is considering:

- telling the two beneficiaries who want to their 25% shares transferred into their new account that 25% of the capital gains from the beneficiary who wants her to sell his portion out of Estate will be added to their respective K-1 form via the1041/K-1 process and see if they still want to proceed or
- just leave the remaining shares in the Estate account for the last beneficiary to maybe give in at some point
- DW risk creating more angst with the other 2 siblings and still just proceed with selling everything at this point besides their strong desire to keep it without having to sell and then rebuy, etc.
- or?

Looking for any perspectives on any option or additional option that may exist on how DW should potentially navigate this situation.

Thanks once again.
-bpg

 

[Montecfo]

I would pick a method and do them all the same and at the same time.

There should be little taxable gain. It would only include changes in value since date of death, since the stocks value is stepped up to fair value at date of death.

 

[Fielding]

I would definitely sell all shares at once and distribute cash, OR distribute even division of all shares at once. Anything else could be a big hassle, and potentially expose your wife to legal problems she herself creates by trying to do the right thing.

I will some day face similar issues, and my plan is to insist everyone provide a brokerage account to receive their distribution of shares. If nobody gets anything until everyone has provided a brokerage account, peer pressure from other siblings can do most of the work on convincing the hold out.

I would favor distributing shares since it has the greatest tax flexibility.

 

[levindb]

Distribute the shares in kind to each sibling. They each create an account somewhere and the distribution has the basis from the date of death. Seems pretty simple. The sibs can then do as they wish with their individual portion.

 

[all4j]

There are a few pieces of info that might help, but I have a few thoughts. 1st, without running up billable hours for in depth research, has she consulted broker/cpa/lawyer involved with estate? They might have some insight from past experience.


The tax & any fees should be fairly easy to estimate. Depending upon size of estate, cap gains might be 0% even. But let's assume it is 15%. I might consider in-kind for 3 siblings and at the same time (important!) sell the last fourth. In advance, tell that sibling they will have to write a check to each of the other 3 to cover. For example, say there are 1000 shares & the grand total of cap gains is $6k. I'd tell sib #4 that the other 3 are each getting 250 shares a pieces which includes an unrealized gain/tax liability. However, sib 4 is getting the cash but has to compensate the others for the estate bearing their tax liability. So, if $1500 cap gain results in $225 in tax & fees make it $240, then they'd write a $80 check to each of the 3 other siblings to keep them whole. Write it up & have all 3 understand & agree in advance.

I somewhat sense that this may be as much about family dynamics as it is financial. There may be a lack of trust & that adds to her risk of things that could go wrong. But a sense of being heard might go a ways toward healing.

Lastly, this probably won't improve with age. It will be worse if stocks take a serious downturn. I'd make a call, set a time limit & say here are the options. Either we agree to plan b by x date, or I sell it all (Can't really distribute in kind to all without their consent, but it can be sold).

Good luck. This isn't overly unusual, but regretfully dealing with family house & contents often even worse (yea, I know that doesn't help here!!)

 

[bpgdeg1234]

Thanks for all of the excellent replies to date. Some info to answer some of the general questions and additional info:

This is a taxable account and broker requires each beneficiary to have or open an account there to receive the transferred shares in their name (the one beneficiary REFUSES to do this while the other 3 are willing hence the stalemate) to have their apportioned share journaled into from the Estate. Brokerage firm won't allow us to transfer shares from the Estate account to a beneficiary external brokerage account they may already have but the beneficiary can do this or whatever else they want to with the shares once their portion of the shares are transferred from the Estate account into their own account there.

No physical certificates allowed as one thought was do 3 electronically and then just send the last hold beneficiary 2 physical certificates but the brokerage came back and indicated their Compliance officer said no can do. Then asked what about everyone getting physical certificates and that came back with no can do as well.

So thinking a potential option may be some type of Affidavit that the 2 beneficiaries who end up getting capital gains from the sold beneficiary sale of his shares out of the Estate agree since the amount is not that much. One will be fine with it but the other not so sure.

As Gill from Bogleheads and others have indicated selling the shares allows Executrix to fulfill her fiduciary responsibility which is to equally distribute the assets as outlined in the Will which makes a lot of sense to avoid this typical situation. Each beneficiary could do whatever they want with the proceeds (buy the same or other shares in their own brokerage account, take the cash, etc.) although they're stuck a bit on having to buy the shares at a higher market price now and pay capital gain taxes. Also, one sibling's financial advisor is specifically recommending for him to take the shares.

As such, before going with my gut instinct to just sell everything and distribute cash this risks having DW tenuous relationship with this specific sibling deteriorate further into the abyss so still looking to exhaust potential options that may still work in this specific scenario in 3 beneficiary keep and 1 beneficiary who sells. Thanks again in advance.

 

[RunningBum]

What is the issue with selling 1/4 of the shares and setting aside that money, after taxes, for the person who wanted it sold? So the other 3 get their shares, and the one person gets the after-tax cash. Don't mix that cash with any other non-brokerage accounts that are being split evenly to avoid confusion.

 

[bpgdeg1234]

What is the issue with selling 1/4 of the shares and setting aside that money, after taxes, for the person who wanted it sold? So the other 3 get their shares, and the one person gets the after-tax cash. Don't mix that cash with any other non-brokerage accounts that are being split evenly to avoid confusion.

Thanks RunningBum for your perspective. If we sell say the 1/4 and it's for example sake after commission comes out to $50,000 with $5,000 capital gains included in that number (but no taxes paid as ultimately will be paid by the beneficiary at tax time) DW would give beneficiary the total $50,000, only $45,000 or what? Confused on how to do this knowing in the end the $5000 capital gain will be apportioned 25% each to the 4 beneficiaries via the 1041 Estate/K-1 distribution process.

 

[RunningBum]

Thanks RunningBum for your perspective. If we sell say the 1/4 and it's for example sake after commission comes out to $50,000 with $5,000 capital gains included in that number (but no taxes paid as ultimately will be paid by the beneficiary at tax time) DW would give beneficiary the total $50,000, only $45,000 or what? Confused on how to do this knowing in the end the $5000 capital gain will be apportioned 25% each to the 4 beneficiaries via the 1041 Estate/K-1 distribution process.

I have no experience in settling an estate so this is only a suggestion to look into, not a recommendation.

I assume your wife has an account open for the estate to pay bills, final taxes, etc. I would open a second account that has the $50K proceeds from the sale. When taxes are figured, determine how much the tax on the $5K gain was, and move that from the second account to the first. Upon distribution to the beneficiaries, the other 3 get their shares, and the 4th gets what's in that second account, which is $50K minus taxes. Calculate the final estate tax return with and without the sale if you have to, to determine the tax on that sale.

Certainly all or nothing would be easier, but I'm not seeing a reason that this can't be worked out evenly without any heirs have to reimburse others for taxes paid.

I believe the estate gets the same stepped up basis that heirs get, correct? But any sale become short-term, unless the estate has been open for more than a year.

 

[bpgdeg1234]

I have no experience in settling an estate so this is only a suggestion to look into, not a recommendation.

I assume your wife has an account open for the estate to pay bills, final taxes, etc. I would open a second account that has the $50K proceeds from the sale. When taxes are figured, determine how much the tax on the $5K gain was, and move that from the second account to the first. Upon distribution to the beneficiaries, the other 3 get their shares, and the 4th gets what's in that second account, which is $50K minus taxes. Calculate the final estate tax return with and without the sale if you have to, to determine the tax on that sale.

Certainly all or nothing would be easier, but I'm not seeing a reason that this can't be worked out evenly without any heirs have to reimburse others for taxes paid.

I believe the estate gets the same stepped up basis that heirs get, correct? But any sale become short-term, unless the estate has been open for more than a year.

Thanks again. Sales will be long-term since inherited. Taxes aren't paid by the estate as gains get distributed out to the beneficiaries since money would be disbursed the same year to them.

 

[Montecfo]

The holding period of the inherited shares is automatically long-term, regardless of actual.

To the OP: what is giving rise to the capital gains? Share values rose since date of death?

 

[cathy63]

... Confused on how to do this knowing in the end the $5000 capital gain will be apportioned 25% each to the 4 beneficiaries via the 1041 Estate/K-1 distribution process.

Do you know for sure that the cap gain must be apportioned 25% to each, or are you assuming that? It seems like the simple solution here is to issue K-1s that apportion 100% of the cap gain to the sibling who wants to sell his shares and 0% to the other three.

I don't know if there's some legal reason why this can't be done, but that seems like a question that an estate attorney or a CPA who specializes in trusts and estates should be able to answer without running up a huge bill.

 

[bpgdeg1234]

The holding period of the inherited shares is automatically long-term, regardless of actual.

To the OP: what is giving rise to the capital gains? Share values rose since date of death?

Funny you ask. Capital gains was like $10,000 per beneficiary portion a few weeks ago but now with market heading South down to around $5,000 each. Keep waiting and the problem may correct itself lol

 

[bpgdeg1234]

Do you know for sure that the cap gain must be apportioned 25% to each, or are you assuming that? It seems like the simple solution here is to issue K-1s that apportion 100% of the cap gain to the sibling who wants to sell his shares and 0% to the other three.

I don't know if there's some legal reason why this can't be done, but that seems like a question that an estate attorney or a CPA who specializes in trusts and estates should be able to answer without running up a huge bill.

I've been informed that since this will be "first and final 1041 estate tax form in 2022" that the capital gains, as well as other income and administration expenses incurred by the estate will get distributed pro rata out 25% each via K-1 forms come tax time. So the $5,000 gain would go out $1,250 per beneficiary for their taxes.

I know we could technically override the K-1 capital gains field in Turbotax Form mode to place all capital gains from the sale on the one holdout beneficiary K-1 and $0 out the ones who kept the shares but not sure if this is legit to do.

 

[ERD50]

I've been informed that since this will be "first and final 1041 estate tax form in 2022" that the capital gains, as well as other income and administration expenses incurred by the estate will get distributed pro rata out 25% each via K-1 forms come tax time. So the $5,000 gain would go out $1,250 per beneficiary for their taxes.

I know we could technically override the K-1 capital gains field in Turbotax Form mode to place all capital gains from the sale on the one holdout beneficiary K-1 and $0 out the ones who kept the shares but not sure if this is legit to do.

I was also going to suggest what cathy63 brought up.

I ran this by the tax guy I used to settle MIL's estate at the time (2019 TY). I wanted to avoid sending K-1s to all ~dozen g-kids, and complicate their (mostly simple) taxes, so suggested that the K-1's be apportioned 1/3rd to each of the 3 siblings (and they all agreed). He had no problem with that, he only wanted a note from each sibling that they accept the 1/3rd (which we never actually got around to doing).

He's an experienced tax guy, and consulted a CPA on one other issue, so I assume it's legit, but I can't say for sure. We both discussed it, and we really felt Uncle Sam doesn't care who pays a tax, as long as it gets paid. What would even trigger a question? The IRS wouldn't even be aware of the other beneficiaries, there's no taxable tie in w/o the K-1. I mean, if you wanted to pay my taxes, Uncle Sam would take the money. We could run a test .

The only problem would be if a sibling backed out later, and didn't want the K-1 burden, but they'd be the one in trouble with the IRS, their SSN is on it. They'd have to convince the IRS it was issued in error. Pretty unlikely, but get it in writing to be sure.

-ERD50

 

[SecondCor521]

My understanding is that the K-1 distributive shares from the assets must (i.e. should) match the terms of the will since this is an estate asset. So if the will said 25% to each kid (as it probably does), then the K-1s would have to follow suit and reflect 25% of the capital gains, interest or whatever attributable to the estate asset.

If, hypothetically, OP's DW was the decedent's favorite and got 50% of the underlying asset, then her K-1 would get 50% of the earnings.

If OP's DW does it differently and everyone agrees? Well, then if someone gets grumpy later they could decide to sue DW as executrix for not following the terms of the will. It'd be costly for the grumpy party, and it's possible that the will and/or state law permits the executrix to use estate assets to pay for her defense. How plausible that outcome would be for OP's DW to assess.

(ETA: The above is my understanding of a typical situation. It might differ based on the language of the will and the applicable state estate laws.)

OP, why is the recalcitrant person refusing to open the inherited account? Do they not want another account? Do they think they can somehow avoid (their share of) the capital gains? Do they not know how to transfer or sell the shares once the shares are transferred to their inherited account? Do they not understand that they're holding up the process and can get the cash they seem to want by going along with the standard process?

It may be worth a Zoom meeting between your DW, the recalcitrant beneficiary, and the brokerage company to discuss - once you understand the why, that may illuminate how to move forward.

Another possibility would be for the recalcitrant beneficiary to execute a partial disclaimer with respect to their 1/4th of this particular account with the understanding that you would make it up to them (on an after tax basis) out of other assets outside of the probate process? If the amount is under $48K ($16K x 3) or so and everyone trusts each other, and there are no secondary beneficiaries on this account, then it might work.

 

[bpgdeg1234]

See comments embedded below

My understanding is that the K-1 distributive shares from the assets must (i.e. should) match the terms of the will since this is an estate asset. So if the will said 25% to each kid (as it probably does), then the K-1s would have to follow suit and reflect 25% of the capital gains, interest or whatever attributable to the estate asset.

If, hypothetically, OP's DW was the decedent's favorite and got 50% of the underlying asset, then her K-1 would get 50% of the earnings.

If OP's DW does it differently and everyone agrees? Well, then if someone gets grumpy later they could decide to sue DW as executrix for not following the terms of the will. It'd be costly for the grumpy party, and it's possible that the will and/or state law permits the executrix to use estate assets to pay for her defense. How plausible that outcome would be for OP's DW to assess.

(ETA: The above is my understanding of a typical situation. It might differ based on the language of the will and the applicable state estate laws.)

OP, why is the recalcitrant person refusing to open the inherited account? Do they not want another account? No they do not as they just want to have their shares sold. Do they think they can somehow avoid (their share of) the capital gains? No don't think this factors into his thinking. Do they not know how to transfer or sell the shares once the shares are transferred to their inherited account? Don't want to do this step and fill out the lengthy brokerage form with all the personal info for shares he just wants sold. Do they not understand that they're holding up the process and can get the cash they seem to want by going along with the standard process? Not a great relationship with 2 of the siblings at this point but could come around as he sees DW is serious in not selling his share out of the estate and the other 3 get their shares moved into their personal accounts that will be setup

It may be worth a Zoom meeting between your DW, the recalcitrant beneficiary, and the brokerage company to discuss - once you understand the why, that may illuminate how to move forward. DW discussed this for a year starting with the sale of the house and never happened so highly doubtful. A group txt chat was about the extent of communication and that recently has fallen apart as the one holdout sibling has withdrawn from that

Another possibility would be for the recalcitrant beneficiary to execute a partial disclaimer with respect to their 1/4th of this particular account with the understanding that you would make it up to them (on an after tax basis) out of other assets outside of the probate process? DW really wants to have straightforward accounting and also don't see the holdout beneficiary or other 2 beneficiaries ever agreeing to this. If the amount is under $48K ($16K x 3) or so and everyone trusts each other, and there are no secondary beneficiaries on this account, then it might work.