Vanguard Mutual Fund Account - Distribution of Funds (Estate)

[Yardley CPA]

Estates are not my thing.  A client posed this question to me: 

I have a Vanguard account that my Mom set up for me to distribute to my sons when my brother passed if he didn't need the money for his care. He recently passed. The account was worth $105,000 on 12/31/17. I have two ways to do this. Split it three ways and transfer the 5 funds to my sons or sell it and give them checks. The cost basis is $52,000. I could sell it all at once and pay taxes on the gains, or sell it over two years or three. What would be the best way to do this? I don't want the gains to change our tax bracket. We don't mind paying the tax on this.

Does cost basis even come into play?  I thought the basis was the FMV at date of death (in this case, I assume it would be the mothers DOD, not the brothers, since it was mother's account?)   Would appreciate any advice.  Thank you. 

[Ringers]

If the mother's estate left the account to your client upon her death with an informal understanding that it was to be used to provide care for the client's brother, then the basis would be mothers DOD.  If, howeveer, the fund was left to the client's brother for his care (or even in trust for the care of your client's brother), then I believe your client has another step up in basis as of his brother's DOD.

With regard to tax bracket change, since the sale would result in LTCG, the gain would be taxed at capital gain rates, at lease on the Federal side.  Depending on the state of residency, the amount of gain could affect the State tax bracket.

Just my thoughts on the matter.

[Catherine]

It almost sounds like the money was left in your client's name rather than in an estate or trust.  If that's the case, there would be gift tax implications to just give the entire $35K to each son this year.  It might be best to give the money out over a couple of years to avoid the need for gift tax returns.

He does not say how old the sons are.  If they are adults, my advice would be to confer with the sons and see what they want - cash or stock.  As long as each gets what he wants, and everyone knows the choices presented and what was made by each, there *should* not (ah, note use of the conditional!) be hard feelings down the line if one takes all cash and the other gets higher (or lower) value stock.