Is money liquidated from inherited mutual funds reportable to IRS?

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McMillion
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Is money liquidated from inherited mutual funds reportable to IRS?

Post by McMillion » Thu Feb 13, 2020 3:20 pm

I received cash from the Executor of my Father-in-law's will. The cash, as I understand it, was from the sale of my Father-in-law's stock mutual funds (in a taxable account, not an IRA). Because my Father-in-law had no beneficiaries identified on his investment account, it took about 8 months from his death for the account to go through some state probate process. Instead of receiving an in-kind distribution of the mutual funds, the Executor sold the mutual funds and sent all of the children a check, dividing equally all of the proceeds from the sale of the funds. I am assuming that there was a gain in value from the stepped-up cost basis on date of death, given the rise in the overall stock market over the 8 months. But I don't know what gain and have received no information on what mutual funds were sold or the stepped-up basis amount, etc. I just got a check from the Probate attorney/Executor.

Do I have to report any gains to the IRS? How would I go about calculating that?

PaunchyPirate
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by PaunchyPirate » Thu Feb 13, 2020 4:36 pm

One possibility is that the estate paid all taxes due prior to the disbursement of the funds to the heirs. Because I don't want my heirs to get hit with tax complexity (fearing they won't know how to deal with it and will get hit with huge tax bills after they spent the money), my attorney has set up my will to indicate that the estate is to pay all taxes due and then pay the heirs what is left.

fabdog
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fabdog » Thu Feb 13, 2020 5:14 pm

you should ask the executor/attorney whether a tax return was filed for the estate, and if any income resulted that would be passed on.

The funds should have had stepped up basis to the date of your father in law's death. Depending on how long it took to sell the shares, there may be minimal gains. Also expenses of the estate would get deducted (executor fees, tax prep). If there was any income/cap gains left over after that, you'd get a K1 showing your share

The attorney, if they disbursed funds, should be able to tell you what to expect for tax purposes.

Mike

quantAndHold
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by quantAndHold » Thu Feb 13, 2020 5:20 pm

The estate might have paid the tax, or you might be getting a surprise K-1 on April 16. Or you might get a K-1 anytime between now and next April 16, depending on when the stock was sold and the tax return filed. Or, the executor sold everything out the minute they got the testamentary letter, and there are no gains. It could go any number of ways.

You should ask.
Yes, I’m really that pedantic.

fourwheelcycle
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fourwheelcycle » Thu Feb 13, 2020 5:33 pm

I would say the taxes for any gains realized before a check was written to you should have been paid by the estate. You should only have to worry about taxes for income related to the funds that is reported to the IRS under your SS number.

Gill
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by Gill » Thu Feb 13, 2020 7:02 pm

fourwheelcycle wrote:
Thu Feb 13, 2020 5:33 pm
I would say the taxes for any gains realized before a check was written to you should have been paid by the estate. You should only have to worry about taxes for income related to the funds that is reported to the IRS under your SS number.
Fourwheel, you’re inventing tax law. Any gains on these sales would be realized by the estate. However, as stated above, there may be deductions in the estate offsetting these gains. An estate can file its tax return on a fiscal year. At some point, OP should receive a K-1 reporting the income taxable to OP, if any. The only certain answer must come from those administering the estate.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

fourwheelcycle
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fourwheelcycle » Thu Feb 13, 2020 10:03 pm

deleted Duplicate Post
Last edited by fourwheelcycle on Thu Feb 13, 2020 10:05 pm, edited 1 time in total.

fourwheelcycle
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fourwheelcycle » Thu Feb 13, 2020 10:05 pm

Gill wrote:
Thu Feb 13, 2020 7:02 pm
At some point, OP should receive a K-1 reporting the income taxable to OP, if any. The only certain answer must come from those administering the estate.
Gill
That's news to me, but I have only served as executor for one estate, for my aunt. I don't remember all of the details, but I know I managed the distribution so her estate paid all the taxes and her heirs, including my mother, received checks from me with letters that said they would owe no taxes on the money they were receiving. If I had set it up so the heirs were going to owe some amount of taxes I definitely would have made that very clear in the letters accompanying each check. I would never have left her heirs guessing, which appears to be the condition the OP was left in.

Gill
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by Gill » Fri Feb 14, 2020 9:01 am

fourwheelcycle wrote:
Thu Feb 13, 2020 10:05 pm
Gill wrote:
Thu Feb 13, 2020 7:02 pm
At some point, OP should receive a K-1 reporting the income taxable to OP, if any. The only certain answer must come from those administering the estate.
Gill
That's news to me, but I have only served as executor for one estate, for my aunt. I don't remember all of the details, but I know I managed the distribution so her estate paid all the taxes and her heirs, including my mother, received checks from me with letters that said they would owe no taxes on the money they were receiving. If I had set it up so the heirs were going to owe some amount of taxes I definitely would have made that very clear in the letters accompanying each check. I would never have left her heirs guessing, which appears to be the condition the OP was left in.
A cash bequest of a fixed amount doesn’t carry out income. A residuary bequest usually does.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

fourwheelcycle
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fourwheelcycle » Fri Feb 14, 2020 9:52 am

Gill wrote:
Fri Feb 14, 2020 9:01 am
A cash bequest of a fixed amount doesn’t carry out income. A residuary bequest usually does.
Gill
I had to look up residuary! My aunt's will left her remaining estate after all bills were paid to her four siblings, in equal shares, per stirpes.

Gill
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by Gill » Fri Feb 14, 2020 10:55 am

fourwheelcycle wrote:
Fri Feb 14, 2020 9:52 am
Gill wrote:
Fri Feb 14, 2020 9:01 am
A cash bequest of a fixed amount doesn’t carry out income. A residuary bequest usually does.
Gill
I had to look up residuary! My aunt's will left her remaining estate after all bills were paid to her four siblings, in equal shares, per stirpes.
It’s just a share of what’s left as opposed to a pre residuary gift or devise of $1,000 or whatever.

You’re right about informing beneficiaries. I always alerted beneficiaries to the tax consequences of a distribution.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

fourwheelcycle
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Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by fourwheelcycle » Fri Feb 14, 2020 1:04 pm

Gill wrote:
Fri Feb 14, 2020 10:55 am
You’re right about informing beneficiaries. I always alerted beneficiaries to the tax consequences of a distribution.
Gill
I'm glad I was right about something!

Thank you for advising me about K-1 reporting and residuary bequests. I had heard of both terms but I did not know what they meant. I appreciate your advice. I'm glad I didn't offer the OP any advice about making sure his FIL's executor used the right cost basis for the mutual funds when they were sold; I probably would have gotten that wrong also. There are some gaps in my knowledge because I did not do very well in high school. I actually enjoyed the school; I just didn't like the principal of the thing.

Topic Author
McMillion
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Joined: Thu Feb 13, 2020 3:07 pm

Re: Is money liquidated from inherited mutual funds reportable to IRS?

Post by McMillion » Fri Feb 14, 2020 2:50 pm

Thank you all for the input. I asked the Executor (my BIL) and he said he wasn't sure about taxes. The stock mutual funds were liquidated and put into the deceased's estate account with a new EIN obtained by the Executor. The the Executor wrote checks of equal amounts to the deceased's children from that account after the funds cleared probate. I advised the Executor to consult a tax attorney to see if the estate owes any taxes and to let me know if I will owe any taxes on the gains from date of death to sale of mutual funds...

Taxes are confusing!!

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