Capital gains taxes for estates

[BarbWire]

Hi all --

(Sorry if this has been addressed elsewhere; my search didn't find anything, but my search skills are pretty lame.)

I am executor for my mother's estate (died December 2015). A substantial portion of her assets were at Vanguard in a taxable account (~$1.2M) in four funds (Admiral Shares):

• Growth Index 31%
• Total Stock Market 14%
• Wellesley 35%
• Wellington 20%

As Executor, I have to decide whether to distribute shares of the mutual funds to her heirs, or to sell the mutual funds and distribute cash.

I want to file the Federal estate income tax return and close the estate in June; by then, her estate will have approximately $19,000 in 2016 income ($8,000 in Q1 dividends, expect $8,000 in Q2 dividends in June, and $3000 misc income in January 2016). So far there are no deductions (eg charitable contributions) but I could make a $5000 contribution from her estate if that makes sense to reduce taxable income. There is a *tiny* chance that I could close the estate before the June dividends are paid, but it would be after they are declared in May, so that probably doesn't help.

So, here is the question: None of the heirs want to hold Wellilngton or Wellesley in their taxable accounts -- at Vanguard or elsewhere. In terms of cap gains taxes (and for the estate is it almost entirely long term cap gains), will the taxes be lower if the estate sells the shares, or if the heirs inherit shares and then sell (assume all heirs are at 15% LTCG)?

I've tried to research this a bit, but everything I've found seems to muddle up estates and trusts. One source indicated the estate will be subject to paying a Medicare tax in addition to cap gains, but another indicated that applies only to onging trusts that are paying out cap gains as income to beneficiaries year after year.

Thoughts? The CPA who will do the estate return is on post-tax recovery vacation til the end of May so I can't ask him.



Thanks!

 

[Dash man]

Captal gains taxes for estates

Basis is reset on the date of death. Pass the shares to the beneficiaries after all taxes are paid and look up the share value on the date of death so the beneficiaries have it for their records.
Edit: You can check IRS.gov, but your CPA should know this.

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[GrayHare]

No one (the estate or beneficiaries) should have long term cap gains on those assets yet because their cost basis was stepped up upon your mother's passing December 2015.

 

[BarbWire]

No one (the estate or beneficiaries) should have long term cap gains on those assets yet because their cost basis was stepped up upon your mother's passing December 2015.

The Vanguard website shows unrealized LT and ST cap gains for the estate account. I should note that Father died in January 2015 (accounts held jointly) so she became the sole owner effective Jan 2015 with her cost basis stepped up effective his date of death. However, the cost basis share price being shown on her new Vanguard estate account page is for her date of death for shares she owned at her death -- mostly eligible for LT cap gains now -- and of course market price for shares (dividends) acquired in March 2016.

But the question remains: in terms of minimizing cap gains and other taxes, are we better off having the estate sell the mutual funds and take the cap gains hit (15% ? more? And is there an estate income threshhold below which the cap gains rate is 0%?) or should the heirs just take the 15% CG hit themselves?

 

[Dash man]

Let the heirs make the decision. If they want to sell they can.


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[Texas Proud]

The Vanguard website shows unrealized LT and ST cap gains for the estate account. I should note that Father died in January 2015 (accounts held jointly) so she became the sole owner effective Jan 2015 with her cost basis stepped up effective his date of death. However, the cost basis share price being shown on her new Vanguard estate account page is for her date of death for shares she owned at her death -- mostly eligible for LT cap gains now -- and of course market price for shares (dividends) acquired in March 2016.

But the question remains: in terms of minimizing cap gains and other taxes, are we better off having the estate sell the mutual funds and take the cap gains hit (15% ? more? And is there an estate income threshhold below which the cap gains rate is 0%?) or should the heirs just take the 15% CG hit themselves?

It does not matter what the Vanguard site shows.... the basis is stepped up... period..


Now, you can use an alternate value date if you want... but either way the basis is adjusted...

What Value of an Asset is Used for Estate Tax Purposes?



Now, if the benes do not want to hold the shares, just sell them and pass the money to them... BTW, you can do partial distributions as long as you know there will be enough money to pay everything that is required... I would have paid out a good chuck of money by now if I were executor....

 

[meierlde]

Hi all --

(Sorry if this has been addressed elsewhere; my search didn't find anything, but my search skills are pretty lame.)

I am executor for my mother's estate (died December 2015). A substantial portion of her assets were at Vanguard in a taxable account (~$1.2M) in four funds (Admiral Shares):

• Growth Index 31%
• Total Stock Market 14%
• Wellesley 35%
• Wellington 20%

As Executor, I have to decide whether to distribute shares of the mutual funds to her heirs, or to sell the mutual funds and distribute cash.

I want to file the Federal estate income tax return and close the estate in June; by then, her estate will have approximately $19,000 in 2016 income ($8,000 in Q1 dividends, expect $8,000 in Q2 dividends in June, and $3000 misc income in January 2016). So far there are no deductions (eg charitable contributions) but I could make a $5000 contribution from her estate if that makes sense to reduce taxable income. There is a *tiny* chance that I could close the estate before the June dividends are paid, but it would be after they are declared in May, so that probably doesn't help.

So, here is the question: None of the heirs want to hold Wellilngton or Wellesley in their taxable accounts -- at Vanguard or elsewhere. In terms of cap gains taxes (and for the estate is it almost entirely long term cap gains), will the taxes be lower if the estate sells the shares, or if the heirs inherit shares and then sell (assume all heirs are at 15% LTCG)?

I've tried to research this a bit, but everything I've found seems to muddle up estates and trusts. One source indicated the estate will be subject to paying a Medicare tax in addition to cap gains, but another indicated that applies only to onging trusts that are paying out cap gains as income to beneficiaries year after year.

Thoughts? The CPA who will do the estate return is on post-tax recovery vacation til the end of May so I can't ask him.



Thanks!

There must be other assets if you are filing an estate tax return since below 5.4 million (or whatever is left of the combined 10.4 million between her and her late husband you don't have to file a return.

 

[Texas Proud]

There must be other assets if you are filing an estate tax return since below 5.4 million (or whatever is left of the combined 10.4 million between her and her late husband you don't have to file a return.

I think he is talking about an estate income tax return...


To OP... I forgot about this.... if so, then it really does not matter... all income will flow with the distributions to the benes... IOW, you fill out the income tax return and then deduct the distributions... a K-1 is sent to the people who got the money...

 

[BarbWire]

Oops, yes, I meant her estate INCOME tax return. Total value of the estate was about $2.1M.

(My dad was a teacher, they lived below their means, invested at Vanguard and TRowe Price and when they paid off their modest mortgage 30 years ago never had another penny of debt. And for 25 years they went to Europe for a month every summer: they lived the life they wanted, and lived well.)


Yes, the basis was stepped up on her death date -- for the estate and for heirs. So again, since no one (including me) wants to hold Wellington and Wellesley, I"m trying to figure out how to minimize cap gains: let the estate take the hit (so we inherit a smaller sum) or let each heir take the hit on his/her individual income tax return.

My head hurts. Time for a Saturday evening beer.

Thanks, everyone!

 

[GrayHare]

If the estate sells an asset the executor can choose to either retain capital gains (if any) or distribute them to the beneficiaries. If the cap gains are retained, the estate will owe the CG taxes. If the executor distributes the cap gains, those gains will not be taxed to the estate but instead will appear on the K-1 forms given to the beneficiaries, who will have to pay the pending taxes themselves at their own CG tax rate.

 

[Hermit]

...
My head hurts. Time for a Saturday evening beer.

Thanks, everyone!

I can't help you on the taxes, but on that last comment I can agree. I think I'll join you!

 

[Souschef]

I am sorry, but I think you are missing the point. Unless the shares have appreciated since the date of your mother's death, there are NO capital gains.
I had to deal with this with my MIL's estate and after my wife died.
If none of the heirs want those funds, sell the funds and distribute the money.
As someone said, you or your CPA will send out K-1's on the sales. For example, if each heirs shares were valued at 10K on the date of your mother's death, and the share was now worth 11K, the heir would have to pay capital gains on1K.

 

[BarbWire]

Thank you, everyone.

Yes, the shares have appreciated since her death, so there will be cap gains to be paid when they are sold. My inclination is to sell all of her Wellington and Wellesley, the estate will take the hit for the cap gains on the estate income tax return, and the heirs only have to deal with inheriting cash.

Too bad Turbo Tax only makes dealing with estate available in their top-of-the-line product (which I don't have) -- guess I could get it and run an estate income tax simulation!

Have a good weekend, everyone.

 

[Gill]

When you distribute the estate this will pass out any gains to the beneficiaries. You are best off liquidating the estate and distributing cash. You should have done this already to eliminate any potential personal liability to the beneficiaries for exposing the estate to risk.
Bruce



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[Gill]

To further elaborate, you have no choice. Distributing the estate causes any gains to be carried out to the beneficiaries even though the sales were made in the estate.
Bruce



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[Texas Proud]

Thank you, everyone.

Yes, the shares have appreciated since her death, so there will be cap gains to be paid when they are sold. My inclination is to sell all of her Wellington and Wellesley, the estate will take the hit for the cap gains on the estate income tax return, and the heirs only have to deal with inheriting cash.

Too bad Turbo Tax only makes dealing with estate available in their top-of-the-line product (which I don't have) -- guess I could get it and run an estate income tax simulation!

Have a good weekend, everyone.

As MBMiner said... the estate does not take the 'hit' as you say... unless you plan on holding the money until next year and not distributing out a penny to anybody...


Paying income tax on an estate is the same as a trust.... and those tax rates are pretty high pretty fast...


You also seemed to just ignore my post about having a DIFFERENT valuation date that would mean NO cap gains... so I am out of here...

 

[BarbWire]

Geez, TexasProud -- didn't mean to offend you. I've got looking into that on my list of things to do in the coming week.

MBMiner: I've only had the authority to act for a week: first had to get a court date to be appointed Executor, and then Vanguard took nearly 8 weeks just to transfer her accounts from her name to estate accounts (including "misplacing" twice the PDFs of her death certificate and the Letters Testamentary). I'm moving as fast as I can.

Thanks for the insights, everyone. Have a nice weekend.

 

[Gill]

Don't worry about an alternate valuation date. That doesn't apply to an estate not subject to Federal estate tax.
Bruce


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[Gill]

Just noticed your remark about making a charitable contribution from the estate. Not only is there no such thing as a charitable deduction against estate income, but where is your authority for giving away estate assets?
Bruce


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[meierlde]

Here is a link to the estate and trust tax rates : Calculate Decedent, Estate, or Trust Business Income and Capital Gains and Losses - For Dummies

However note that any income transfered out on k-1 does not count here. You also have a $600 exemption for the estate.
Looking at your circumstances if you include the sale on the distributions on the k-1s it will in all likleyhood save taxes assuming the beneficiaries are not in the top personal tax bracket. The tax rate on dividends and cap gains under the 12,300 amount is 15% in the estate. If you distribute the total amount on k-1 no tax will be due on the 1041. But as long as you stay below 12,300 total income after distributions it would be a wash no matter if you sell or distribute the shares. However the hassle of transfering the shares may make selling them easier.

 

[BarbWire]

Thank you for the time you all have spent giving me valuable observations, links and input. I have a lot more to read before the CPA is available in June.

Have a good weekend.

 

[Texas Proud]

Don't worry about an alternate valuation date. That doesn't apply to an estate not subject to Federal estate tax.
Bruce


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Thanks for the info... I just read a bit more about it and saw the limitations...

 

[pb4uski]

Why not just transfer 1/x th of the shares in-kind to each beneficiary and let them decide whether or not they want to keep and if they decide to sell then any appreciation or depreciation since you Mom's death would be capital gain or loss since the basis was reset at her death?

 

[Gill]

Why not just transfer 1/x th of the shares in-kind to each beneficiary and let them decide whether or not they want to keep and if they decide to sell then any appreciation or depreciation since you Mom's death would be capital gain or loss since the basis was reset at her death?

I think many posters here are making this too complicated. I administered hundreds of complex estates over a 35-year career in the trust business with some major trust institutions, and the cardinal rule was to liquidate most estates promptly and distribute cash, unless the beneficiaries specifically requested certain assets and agreed to indemnify the executor for any loss resulting from retention of those securities. An executor who retains the decedent's original assets for an unreasonable length of time does so at his peril and subjects himself to personal liability for any loss resulting.

When there are multiple beneficiaries it rarely makes sense to distribute in kind because it become very complex and difficult to make equitable distributions. Give them cash and let them invest in whatever they wish.

I did that in most estates I administered including my Mother's estate and everyone was happy.

Bruce

 

[pb4uski]

I think what I posted is what would happen if the decedent had beneficiary designations rather than a will. Each beneficiary would receive a percentage of the shares held by the decedent (with step-up to value on date of death), right? Easy peasy.