Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

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Le Chuck
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Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by Le Chuck » Mon Mar 19, 2018 4:42 pm

Hello everyone,

We recently suffered a loss in the family, and my wife (together with her siblings) inherited a trust that has been in place since the 1970s.The trust is divided into real estate (roughly 1/3rd) and securities (2/3rds), and it is shared among three children (my wife's siblings).

The rules of the trust require that it be dissolved and divided out at this point. If we understand correctly, we can set up our own LLC to manage the assets or we can liquidate everything and do a cash division.

For the real estate, the siblings decided to sell the property (as opposed to taking over management) because it is a substantial (read: a third of the world away) distance from them.

For the securities, we have been given forms from the law office that manages the trust. These forms give us the option of having the law firm sell the securities and disbursing cash among the siblings (incurring taxes on unrealized gains of $164,000 according to the law firm), or alternately, directly transferring the holdings to our mutual fund manager or transfer agent.

What are the tax implications of each option? Will there be an inheritance tax on top of the gains tax? What is the best way to disburse this among the three siblings while minimizing potential sources of conflict?

For perspective, the current financial situation of the three siblings is significantly varied. One of the siblings will require a settlement as soon as possible. We are also concerned about how taxes will be divided up (fear of being left with a tax bill for the entire operation).

Appreciate any thoughts or suggestions here.

Thanks all!

Edit: Forgot to mention, we do not have a mutual fund manager or transfer agent. We are very conscientious savers into our retirement account at Vanguard, but outside of index funds do not buy or sell stock. The current trust assets are spread across a wide range of holdings but many of them are showing returns in the 1% range.

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Sandtrap
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by Sandtrap » Mon Mar 19, 2018 4:48 pm

Condolences on your loss.
Welcome.

This is where you bring in the pros.
1 Legal Counsel (Estate Attorney)
. . . The Trust has legal counsel. Is everyone on retainer? You might consider your own legal counsel as well.
2 CPA or Accounting Firm

In the past several instances of relatives with substantial estates, these 2 professional entities were brought in. It goes a long way to keeping relationships intact and worth every penny.

j :D

Le Chuck
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by Le Chuck » Mon Mar 19, 2018 5:01 pm

Thanks for the note.

The law firm was the firm that my wife's grandparents used a half-decade ago. The point of contact at the law firm was a personal friend of the parent my wife lost. So up to this point we have not engaged with a different law firm. Writing that I can see how it doesn't make much sense, but I think there are feelings of loyalty to the firm via this friend. A second issue is that one of the other siblings is functionally destitute. So we also don't want to create tension by bringing in a law firm knowing that this sibling doesn't have that option and can sometimes be difficult to deal with in general.

The estate total is roughly 1.5 mil in value.

cadreamer2015
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by cadreamer2015 » Mon Mar 19, 2018 5:11 pm

There is generally no inheritance tax (a few states may have this but there is no federal inheritance tax). It sounds like from the information you've gotten from the trust law firm that the cost basis of the stock portfolio is well below current market price and not at the most recent date of death. If this is the case then I think the best course would be to have the stocks transferred in-kind to brokerage accounts for each of the 3 beneficiaries. You can set up a Vanguard brokerage account quite easily if you want to keep your DW's assets under one roof, and the other 2 beneficiaries can set up brokerage accounts wherever they wish. Then once each beneficiary has gotten the stock transferred in they can sell or hold them as they wish. For someone with low income there may be no capital gains tax, depending on how much they sell in any given year. Others might choose to hold on to the highly appreciated stock, sell them at a future date, gift them to someone else or donate them to charity or a Donor Advised Fund. Full disclosure IANAL.

Edited to add that in the event that the stock positions are not evenly divisible by 3 there are several ways to "even things up," including giving the odd share(s) to alternating beneficiaries and settling the valuation difference on date of distribution in cash.
De gustibus non est disputandum

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celia
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by celia » Mon Mar 19, 2018 5:34 pm

The first thing to do is get a copy of the trust and read it. The lawyer should be able to explain the parts you don't understand. The laywer may know the law, but probably not how to invest if they managed the trust for many years in an "up" market and only grew the value 1%. Of course, we don't know if the growth was being used for expenses of the trustors while they were living.

For example, there may be protections in the trust for the person who is "destitute". His/her share might need to be paid out in pieces if there is a reason they can't handle money. The trustors (your parents) likely wouldn't have wanted that person to get a lump sum and blow it all in one year.

In general, the assets get a stepped up value (basis) on the date of death, and the gains that are taxed are based on that basis. So if the deceased died recently, there probably isn't much in gains. However, if there are any IRAs, they need to be handled differently. Every dollar in a tax-deferred account will be taxed as it is withdrawn from the account.

Gill
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by Gill » Mon Mar 19, 2018 5:40 pm

From the information you’ve given, I would urge complete liquidation and distribution of the trust. The gain divided by thirds shouldn’t create a serious tax problem and should be reduced by trust administration expenses. You certainly don’t need your own attorney or CPA. There should be no estate or inheritance tax.
Gill

Le Chuck
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Re: Questions related to the dissolution of a recently inherited trust (taxes, gains, etc)

Post by Le Chuck » Mon Mar 19, 2018 6:05 pm

Thank you all for the posts. In this case the law firm is also a third of a world away. Let me reread the trust and see if there is anything specific about how it is divided. I do not believe that is the case, because it was created prior to all of the children being born. It is a trust from my wife's grandparents to their child.

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