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My mother passed away in October and my sister is in the process of settling everything. Along with her house (which my sister is buying), she had assets in mutual funds, bonds and stock....as well as her IRA.
My sister has cashed out all the equities and has put them into an estate account at the bank. I know we will have to file her taxes for 2009 and we will probably have to pay some federal taxes.

My question is in regards to the equities that were sold after her death. Will the estate have to pay taxes on the capital gains? Her estate, house and equities is less than $500K.

The IRA is not a problem, we were all named as beneficiaries and we will each roll our shares into an inherited IRA.

TIA
Crocket
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The IRA is not a problem, we were all named as beneficiaries and we will each roll our shares into an inherited IRA.


if you didn't know ..if Mom was into RMDs, you'll have to do RMDs


=
....confused the heck out of me
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My mother passed away in October and my sister is in the process of settling everything.

My condolences on your loss.

Along with her house (which my sister is buying), she had assets in mutual funds, bonds and stock....as well as her IRA.

OK. All pretty ordinary things.

My sister has cashed out all the equities and has put them into an estate account at the bank. I know we will have to file her taxes for 2009 and we will probably have to pay some federal taxes.

You'll need to file two tax returns. Your mother's final return will cover all of her usual income and deduction until she passed away. Then you'll also need to file a fiduciary return for her estate. That would include all of the dividends on the equities after she passed away, plus any interest earned on the money held in the bank after the stocks were sold. And you will also report the sales of the stock on the fiduciary return.

My question is in regards to the equities that were sold after her death. Will the estate have to pay taxes on the capital gains?

Yes and no. Yes, the estate will have to report the sale of the stocks. But the cost basis of each stock is changed to the FMV as of the date of her death. So you may not have as much gain as you are thinking.

Her estate, house and equities is less than $500K.

So no Federal Estate Tax return is required. Your state may have different rules on the taxation of estates or inheritances.

The IRA is not a problem, we were all named as beneficiaries and we will each roll our shares into an inherited IRA.

Sounds good.

I rarely think that a Fiduciary return is a good DIY project. Most people file at most a couple of those during their lifetime. I'd suggest you get some professional assistance for that. There are some elections you may want to make, particularly the selection of a fiscal year for the estate and one concerning distributions during the first 45 or 60 days of the year.

--Peter
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if you didn't know ..if Mom was into RMDs, you'll have to do RMDs


=
....confused the heck out of me


Mom was 80, so she was into RMDs. And she also discovered that she didn't have to take one in 2009, which she didn't.
I've checked with 2 reliable sources. We have 3 options available to us.
1) take it all out at once and pay taxes on it
2) take an even distribution over a 5 year period (also pay taxes)
3) do an inherited IRA and take a minimum distribution based on my(our) life expecntancy at the time she turned 70.

With the inherited, the RMD is not much at all. We can take the RMD over the next 20, 30 years or so years. However, if we would happen to need some extra money in year 3, we can take more than the minimum out.

I was confused too. And am still confused.

Crocket
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I rarely think that a Fiduciary return is a good DIY project. Most people file at most a couple of those during their lifetime. I'd suggest you get some professional assistance for that. There are some elections you may want to make, particularly the selection of a fiscal year for the estate and one concerning distributions during the first 45 or 60 days of the year.

--Peter


Thanks. I figured I would have to file 2 returns. I will look at the fiduciary and if it's over my head, I will seek a professional.

Crocket
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Mom was 80, so she was into RMDs. And she also discovered that she didn't have to take one in 2009, which she didn't.

She was correct. Beneficiaries are never required to take an RMD in the year of the account owner's death.

With the inherited, the RMD is not much at all. We can take the RMD over the next 20, 30 years or so years. However, if we would happen to need some extra money in year 3, we can take more than the minimum out.

I imagine you're just using year 3 as an example, but for lurkers, when you're taking an inherited IRA over the beneficiary's life expectancy, you can always take more than the RMD without any consequence other than paying the income tax. The RMD is recalculated annually based on the prior year-end balance.

I was confused too. And am still confused.

It sounds like you understand fine, but if there are further questions, check Pub 590 and feel free to ask away.

Phil
Rule Your Retirement Home Fool
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Thanks. I figured I would have to file 2 returns. I will look at the fiduciary and if it's over my head, I will seek a professional.

In case you didn't know, you need to look at Form 1041 (and associated instructions) for the fiduciary return.

Ira
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I've checked with 2 reliable sources. We have 3 options available to us.
1) take it all out at once and pay taxes on it
2) take an even distribution over a 5 year period (also pay taxes)
3) do an inherited IRA and take a minimum distribution based on my(our) life expecntancy at the time she turned 70.




that's how we ended up (you can add a 3d ,less than reliable source)

Sister chose (1), i chose (2) .. IRA was pretty small
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...Thanks. I figured I would have to file 2 returns. I will look at the fiduciary and if it's over my head, I will seek a professional....

The problem is that you "don't know what you don't know". Everything could seem to make sense but you could be missing a lot.

We had a professional do the taxes for my in-laws estate and they earned much more than the fees cost. In addition they wrote up a financial summary and gave basic instructions to each of the kids on what numbers they should enter where on each of the kid's tax returns which helped out a lot.


Greg
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My question is in regards to the equities that were sold after her death. Will the estate have to pay taxes on the capital gains?

Yes and no. Yes, the estate will have to report the sale of the stocks. But the cost basis of each stock is changed to the FMV as of the date of her death. So you may not have as much gain as you are thinking.


Peter and others ...
Did I understand this correctly? When assets move from the decedant's name to the estate's name they get a step up in cost basis?

Bob
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Peter and others ...
Did I understand this correctly? When assets move from the decedant's name to the estate's name they get a step up in cost basis?

Bob

=================================================
Exactly.

Bill
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<When assets move from the decedant's name to the estate's name they get a step up in cost basis?>


Not necessarily. They could get a step DOWN in cost basis.


B
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Based on the lower of cost OR (FMV) Fair Market Value which has sadly plummeted over the past few years right?

Rich
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Based on the lower of cost OR (FMV) Fair Market Value which has sadly plummeted over the past few years right?

Cost is stops being part of the equation for inherited stocks.
As Peter said (and I've read on this board before):

"the cost basis of each stock is changed to the FMV as of the date of her death."

Whether she bought INTC in September 2000 or September 1980, it doesn't matter. The new basis is now steppped down (from 2000 prices) or up (from 1980 prices) to the FMV as of her death. Mostly people think of it as a "step up in basis" even though it's not necessarily an "up".

And from what I've read here, the relevant time for FMV is as of the date of her death, not when someone moved the stock from one account name to another.
Perhaps one of the resident experts can point to useful information on how to determine the FMV. (closing price for the stock on that date? average of high and low of the stock for that date?)
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And from what I've read here, the relevant time for FMV is as of the date of her death, not when someone moved the stock from one account name to another.

There's another wrinkle which doesn't apply to this specific situation. Namely, you can choose to value the Estate's assets on the date 6 months after death if such an election reduces both the overall valuation of the estate and the total of Estate and Generation-skipping tax.

Perhaps one of the resident experts can point to useful information on how to determine the FMV. (closing price for the stock on that date? average of high and low of the stock for that date?)

Valuation methods are discussed extensively in the instructions for preparing Form 706, www.irs.gov/pub/irs-pdf/i706.pdf. For stocks, it is generally the average of the high and low on the date of death. If death occurred on a day where the stock didn't trade, then it's the weighted average of the average prices of the trading dates closest (before and after) to the date of death.

Ira
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I've checked with 2 reliable sources. We have 3 options available to us.
1) take it all out at once and pay taxes on it
2) take an even distribution over a 5 year period (also pay taxes)
3) do an inherited IRA and take a minimum distribution based on my(our) life expecntancy at the time she turned 70.


Wrt Option 2, this from Pub 590: "Taking balance within 5 years. A beneficiary who is an individual may be required to take the entire account by the end of the fifth year following the year of the owner's death. If this rule applies, no distribution is required for any year before that fifth year."

What this means to me is that the schedule of withdrawals is irrelevant. The two extremes of taking all the money on the first day of the first year of the 5-year period, and taking all the money on the last day of the fifth year of the 5-year period, both satisfy the requirements of the 5-year option.

Eric Hines
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Wrt Option 2, this from Pub 590: "Taking balance within 5 years. A beneficiary who is an individual may be required to take the entire account by the end of the fifth year following the year of the owner's death. If this rule applies, no distribution is required for any year before that fifth year."

What this means to me is that the schedule of withdrawals is irrelevant. The two extremes of taking all the money on the first day of the first year of the 5-year period, and taking all the money on the last day of the fifth year of the 5-year period, both satisfy the requirements of the 5-year option.


You are correct. Also, if 2009 was one of those 5 years, you have 6 years to complete the withdrawal.

Phil
Rule Your Retirement Home Fool
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Did I understand this correctly?

Almost.

When assets move from the decedant's name to the estate's name they get a step up in cost basis?

The important date is the date of death, not the date the assets were transferred into an account titled for the estate or an heir. Otherwise, you are correct. The assets get a step up (or down) to the FMV on the date of death.

--Peter
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Thanks for all the replies. I thought that the cost basis was from date of death.

Crocket
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Wrt Option 2, this from Pub 590: "Taking balance within 5 years. A beneficiary who is an individual may be required to take the entire account by the end of the fifth year following the year of the owner's death. If this rule applies, no distribution is required for any year before that fifth year."

What this means to me is that the schedule of withdrawals is irrelevant. The two extremes of taking all the money on the first day of the first year of the 5-year period, and taking all the money on the last day of the fifth year of the 5-year period, both satisfy the requirements of the 5-year option.



that's how i read it ..


and part of why i chose #2 -- i'd forgotten to take ANY the first two years ..so to avoid penalties took 1/3d, 1/2, all in subsequent years
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