My children have inherited $5 million of stock from their father (whose estate has not yet been dispersed after 11 months) leaving them with a 30% or so loss of value over which they have had no control. Is there any way they could make a choice of which equities they should sell and harvest tax losses? It is their understanding that the 10-year individual retirement account (IRA) withdrawal period is now reduced to nine years which makes it even more taxing. Any help would be appreciated.
I’m sorry to hear about his passing. I’m sure this is already a difficult time for you and your children, and I know that dealing with his unsettled estate and the issue of investment losses don’t make it any easier.
There are potentially a lot of complexities at play here that I am not aware of because I don’t know all the details of the estate, but I’ll try to explain from a big-picture perspective some things that you should be aware of that might help you decide how to move forward from here.
A financial advisor can help you make decisions about handling an inheritance and minimizing taxes.
Speak With the Executor
Without knowing anything else about the estate I can’t say if 11 months is a long time to wait for settlement. Simpler estates can be settled more quickly than complex ones, and more complex estates take longer. If you believe, however, that the settlement is being delayed due to inaction or inability on the part of the executor then this needs to be addressed. That’s particularly true if the delay is causing financial harm to your children.
Even if the delay is not due to anything under the executor’s control, knowing which stocks your children would prefer to sell can help inform the executor’s decisions. Only the executor or an appointed court administrator has the authority to sell estate assets.
Inherited IRA Distributions
Let’s also clarify their understanding of the inherited IRA distribution rules. Assuming your children are not minors then, yes, under current law they have 10 years to withdraw any money held within inherited IRAs. Specifically, the money needs to be withdrawn by the end of the tenth year following the year of death of the original account owner.
If their father passed at any point during 2021, they have until Dec. 31, 2031. If he passed away in 2020, they have until Dec. 31, 2030.
Unfortunately, this clock does start at the time of the original account owner’s death regardless of how long it takes to settle the rest of the estate and distribute the assets.
Harvesting Capital Losses
It’s unclear whether the particular stocks in question are held within the IRA or in a different account. That matters when it comes to figuring out the tax ramifications and whether or not harvesting losses is an option.