Migrating inherited portfolio to Index funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
bertilak
Posts: 5704
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Migrating inherited portfolio to Index funds

Post by bertilak » Sun Dec 03, 2017 12:08 pm

The goal of this post is to ask for ideas on how to deal with the following situation.

I inherited a portfolio of mixed assets: individual stocks and bonds, an unpriced REIT, a couple of limited partnership energy companies, stock funds, bond funds, a balanced fund, and probably other stuff I forgot about, all across 4 or 5 investment institutions, including an IRA. Kind of a complex mess.

My goal is to convert this into a simple three-or-four index fund portfolio. You would think that because of the cost basis step-up with an inheritance it would be a simple matter of selling the old stuf and buying the new.

But -- because of delays in getting a death certificate (name on SSA account didn't match name on birth certificate nor on any of the financial accounts involved) and the inherently slow process of dealing with the situation (e.g mailing certified death certificates and awaiting action), transferring from all those other institutions to Vanguard -- a couple of months elapsed between the date of death (the step-up date) and my freedom to deal with things. This all coincided with the recent surge in the stock market leaving some significant capital gains thereby making the simple "sell it all" plan questionable. (Not a bad problem to have, really.)

My plan so far:
  • Match assets with cap gains and cap losses and sell that batch, but there are not many cap losses to go around.
  • Another possibility that may or may not help is to do gifts in-kind to the people I want to share the inheritance with. (They were not in the will.) The problem here is I don't want to burden them with a pending tax liability. Two of these people are 4 and 6 years old with no income so this may be OK for them.
  • "Bite the bullet" and pay the taxes on things I can't dispose of in other ways. I will probably spit this across 2017 and 2018.
Thanks!
Listen very carefully. I shall say this only once. (There! I've said it.)

livesoft
Posts: 57209
Joined: Thu Mar 01, 2007 8:00 pm

Re: Migrating inherited portfolio to Index funds

Post by livesoft » Sun Dec 03, 2017 12:39 pm

Sounds like a good plan.

You did not mention charitable giving, but just so you know, inherited shares get a long-term basis no matter what. That is, even if they were held short-term by the deceased and even if less than a year from inheriting them. So you get the LT cap gains tax rate or you can donate to a DAF or charity.
This signature message sponsored by sscritic: Learn to fish.

retiredjg
Posts: 30794
Joined: Thu Jan 10, 2008 12:56 pm

Re: Migrating inherited portfolio to Index funds

Post by retiredjg » Sun Dec 03, 2017 12:44 pm

I recall hearing that the basis can be based on the value 6 months after the death. I have no idea what the circumstances might be, but it could be something to look at.

Afty
Posts: 547
Joined: Sun Sep 07, 2014 5:31 pm

Re: Migrating inherited portfolio to Index funds

Post by Afty » Sun Dec 03, 2017 12:46 pm

A few other ideas:

Bucket investments into things you can live with and things you can't, then sell the things you really don't like. Or at least prioritize selling the things you don't want.

Donate appreciated securities, maybe set up a donor advised fund.

For gifting to children, if the gains are greater than $2000, they will have to pay tax at their parents' rate if the investments are sold.

GAAP
Posts: 109
Joined: Fri Apr 08, 2016 12:41 pm

Re: Migrating inherited portfolio to Index funds

Post by GAAP » Wed Dec 06, 2017 12:36 pm

That's basically what I had to do. When possible, I matched losses to gains for an approximate net-zero in one year (taking the small gains also). The following year it was just get out and accept the tax hit.

The IRA can be a pain, depending on where it is held, and what your intentions are for distribution.

Also, watch out for the side-effects of transfer fees -- notably, leaving three cents in an account so that it doesn't actually get closed or transferred (personal experience with Deutsche).

User avatar
bertilak
Posts: 5704
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Migrating inherited portfolio to Index funds

Post by bertilak » Wed Dec 06, 2017 7:28 pm

retiredjg wrote:
Sun Dec 03, 2017 12:44 pm
I recall hearing that the basis can be based on the value 6 months after the death. I have no idea what the circumstances might be, but it could be something to look at.
Thanks! I sent a note off to my CPA with a link to a article about this.
Listen very carefully. I shall say this only once. (There! I've said it.)

retiredjg
Posts: 30794
Joined: Thu Jan 10, 2008 12:56 pm

Re: Migrating inherited portfolio to Index funds

Post by retiredjg » Wed Dec 06, 2017 8:24 pm

Let us know what you find out. I've always wondered about this.

User avatar
bertilak
Posts: 5704
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Migrating inherited portfolio to Index funds

Post by bertilak » Thu Dec 07, 2017 6:19 pm

retiredjg wrote:
Wed Dec 06, 2017 8:24 pm
Let us know what you find out. I've always wondered about this.
I don't fully understand it but it depends on FORM 706. Some text from the 706 instructions:
  • Which Estates Must File
    For decedents who died in 2017, Form 706 must be filed by the executor of the estate of every U.S. citizen or resident:
    1. Whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5,490,000; or,
    2. Whose executor elects to transfer the DSUE amount to the surviving spouse, regardless of the size of the decedent's gross estate. See instructions for Part 6—Portability of Deceased Spousal Unused Exclusion and sections 2010(c)(4) and (c)(5), later.
Neither of those applies to me.
Listen very carefully. I shall say this only once. (There! I've said it.)

retiredjg
Posts: 30794
Joined: Thu Jan 10, 2008 12:56 pm

Re: Migrating inherited portfolio to Index funds

Post by retiredjg » Thu Dec 07, 2017 6:40 pm

So I guess the 6 month thing will not benefit you. Too bad. I suppose you could wait until the crash that everybody has been expecting for days, weeks, months, or years......

Love the holiday hat. :D

User avatar
CyclingDuo
Posts: 913
Joined: Fri Jan 06, 2017 9:07 am

Re: Migrating inherited portfolio to Index funds

Post by CyclingDuo » Thu Dec 07, 2017 11:00 pm

bertilak wrote:
Sun Dec 03, 2017 12:08 pm

My plan so far:
  • Match assets with cap gains and cap losses and sell that batch, but there are not many cap losses to go around.
  • Another possibility that may or may not help is to do gifts in-kind to the people I want to share the inheritance with. (They were not in the will.) The problem here is I don't want to burden them with a pending tax liability. Two of these people are 4 and 6 years old with no income so this may be OK for them.
  • "Bite the bullet" and pay the taxes on things I can't dispose of in other ways. I will probably spit this across 2017 and 2018.
In addition to your plans, you could use all quarterly dividends coming in from this windfall to purchase shares of your three/four fund or ETF portfolio as you figure out what to do with the inherited investments. Your strategy of mitigating the capital gains by utilizing both tax year 2017 and 2018 (and beyond) will help if you are going to trim positions.

We would suggest really studying each and every investment inherited to see what the ER fees are, and get rid of the higher fee assets, as well as those with the highest tax drag in taxable accounts. See if any of the stocks/bonds/REITS/LP's that you inherited fit your investment strategy well enough to hang onto for a longer duration, while selling those that do not. Nice problem to have - inheriting a portfolio in the middle of a bull market where most tides have been rising.

:sharebeer

Post Reply