Deciding Whether to Sell Stocks Before Passing: Key Considerations
If your father-in-law, now 100 years old, is holding onto stocks and bonds purchased decades ago, you’re likely pondering whether he should sell them before his death. This is a common dilemma for those with substantial, long-held investments. Let’s dive into whether it makes sense to sell or hold onto these assets, considering the tax implications and estate planning strategies.
Understanding the Tax Implications of Selling Investments
Selling long-held stocks and bonds can trigger a substantial tax bill. Here’s why:
- Capital Gains Tax: When your father-in-law sells his investments, he’ll owe capital gains tax on the profit. Given that these assets were purchased in the 1980s and 1990s, the gains could be significant, potentially resulting in a hefty tax bill.
- Current Market Value: Since the stock market is currently high, selling now means he would realise these gains and incur taxes. The higher the market value, the higher the potential tax.
Instead of selling, there’s a more tax-efficient strategy: leaving the assets to his heirs.
The Advantage of Inheriting Assets
If your father-in-law holds onto his investments and passes them to his heirs, they can benefit from a tax advantage known as the step-up in basis:
- Step-Up in Basis: When inherited, the assets are typically revalued at their current market value. This means the heirs inherit the assets at their market value on the date of death, not the original purchase price.
- Tax-Free Gains: This step-up essentially eliminates the capital gains tax on the appreciation that occurred during your father-in-law’s lifetime.
There are exceptions, such as if the investments are in retirement accounts or irrevocable trusts. However, for investments held in revocable trusts (like living trusts), the step-up in basis should apply, making it a tax-efficient option.
Should You Sell or Hold?
Consider the following factors:
- Market Conditions: If the market is exceptionally high, it might seem tempting to sell. However, this could lock in a large tax liability.
- Diversification and Risk: If the portfolio is well-diversified and aligns with a long-term investment strategy, it might be wiser to hold. Significant drops in the market would need to occur to negate gains if the portfolio is sound.
- Financial Advisor Consultation: Engaging a fee-only, fiduciary financial planner can provide personalised advice. They can review the portfolio’s risk and suggest whether any changes are needed.
Tax Strategies for the Rental Property Scenario
In a previous question, a couple considered moving into their rental property, making it their primary residence to utilise the $500,000 home sale exclusion. Here’s an update:
- Gain Exclusion Rules: Not all gains will qualify for exclusion. Gains from the period when the property was rented out are subject to different rules.
- Depreciation Recapture: When selling rental property, any depreciation taken during the rental period must be recaptured, affecting the taxable gain.
- Partial Exclusion: The exclusion applies to gains from the time the property was used as a primary residence and any appreciation after the move.
It’s crucial to understand these rules to maximise the benefit and avoid surprises.
Changes in Medicaid Asset Limits: A California Update
For those concerned about Medicaid (or Medi-Cal in California) eligibility, recent changes are noteworthy:
- Asset Limits Removed: As of January 2024, California has removed asset limits for Medi-Cal. This change means that individuals can now keep more assets without affecting their eligibility for benefits.
- Impact on Inherited Wealth: If someone inherits a significant amount, this change could affect their eligibility for Medicaid or Medi-Cal, depending on their state’s regulations.
Why Personalised Advice Matters
While general information is helpful, personal circumstances vary widely. It’s essential to consult with:
- Tax Professionals: They can provide insights on specific tax implications and strategies.
- Estate Planners: They can offer advice on how best to structure an estate plan to maximise tax benefits and ensure smooth transitions.
- Financial Planners: They can review investment portfolios and recommend adjustments based on current market conditions and individual goals.
Final Thoughts: Making the Right Decision
Deciding whether to sell stocks before passing away involves balancing tax implications with estate planning benefits. Generally, holding onto investments and passing them on can offer significant tax advantages through the step-up in basis.
Consulting with professionals can help tailor strategies to your father-in-law’s specific situation, ensuring the best outcomes for his estate and heirs.
For more detailed guidance on tax strategies, estate planning, and investment decisions, stay tuned to our blog.
