Did Our Lawyer Give Us Good or Bad Estate Advice?

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Serendipitous
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Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Serendipitous »

Dear Bogleheads:
I need your help with something that’s been nagging at me. My father died in the pit of the Covid Crash. As a buy-and-hold investor he would have found it ironic (and wholly appropriate) that the one time he inadvertently tried to time the market it went so badly.

Working with an estate lawyer, his heirs began settling his affairs. The lawyer advised us to liquidate his Vanguard mutual funds. I asked about in-kind distributions since I planned to put my share in Vanguard but the lawyer said it was far too complicated. Better to liquidate and divide the cash.

Fast forward to today and my dad’s heirs have a massive capital gains bill because of the difference between the stepped-up basis on his date of death and the date of sale.

I have read many in the forums here arguing that an executor should liquidate and disburse cash for fiduciary reasons. But we are now all facing a massive (for us) tax bill. I can’t roll back the clock but I would like to know if the lawyer did right by us or completely erred with the advice they gave us.

Many thanks in advance for sharing your wisdom!
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by BarbBrooklyn »

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Soon2BXProgrammer
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Soon2BXProgrammer »

I think the issue might be the time between death and liquidation.

Normally people are advised to sell everything and make it cash QUICKLY, and it all works out, as people might have some minor winners and minor losers, etc. However, if substantial time passed, then selling might no longer make sense as in your situation.

People typically liquidate quickly after death, not at the time when you would settle the estate and make disbursements, because the investments no longer make sense with respect to the goal of the estate. Estates typically aren't to make money, they are to hold money until you can pay it out, hence, selling and giving cash.
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Raymond
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Raymond »

Soon2BXProgrammer wrote: Fri Oct 15, 2021 1:03 pm I think the issue might be the time between death and liquidation.

Normally people are advised to sell everything and make it cash QUICKLY, and it all works out, as people might have some minor winners and minor losers, etc. However, if substantial time passed, then selling might no longer make sense as in your situation.

People typically liquidate quickly after death, not at the time when you would settle the estate and make disbursements, because the investments no longer make sense with respect to the goal of the estate. Estates typically aren't to make money, they are to hold money until you can pay it out, hence, selling and giving cash.
+1

OP, who was in charge of selling the funds, and how much time passed between the date of death and the sale? Did the lawyer advise that the conversion to cash take place within a certain amount of time?
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delamer
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by delamer »

I’m sorry about your father.

Unless the heirs have high incomes that put them in the 20% bracket for long-term gains or cause them to be subject to the NIIT, it’s unlikely that they are paying more than 15% tax on the gains in the account. And maybe 0% in some cases.

It may be a significant amount of money but even if it’s a $100,000 gain, the tax is just $15,000.

The previous post hit the nail on the head. The stocks should have been sold ASAP after death, not held until the estate was being distributed and then sold.
Last edited by delamer on Fri Oct 15, 2021 1:23 pm, edited 1 time in total.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by fposte »

[deleted--I was misinformed myself]
Last edited by fposte on Sat Oct 16, 2021 11:57 am, edited 1 time in total.
sailaway
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by sailaway »

You may have capital gains taxes, but that means you also have more cash than you would have if the sale had been accomplished sooner. I think you are comparing what you are getting to a very unlikely scenario that you preferred of getting the inheritance in kind.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

You only owe taxes when you sell the asset.

I fail to see how the result would be any different had the shares been transferred in kind. You’d still have a large capital gain since the basis is set at date of death.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Soon2BXProgrammer »

Lee_WSP wrote: Fri Oct 15, 2021 1:31 pm You only owe taxes when you sell the asset.

I fail to see how the result would be any different had the shares been transferred in kind. You’d still have a large capital gain since the basis is set at date of death.
What i have seen elsewhere, is some people liquidate the estate quickly, then they on paper account for their inheritance as cash/bonds in their asset allocation, then they make their own retirement accoutns more stock heavy to make up for it.

But you are right, this is all just a timing issue of when its taxed, and if the estate would have sold, unless they also took the above strategy, they would have less money then they have now, with the gains/taxes.
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billfromct
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by billfromct »

It sounds like the Vanguard mutual funds were in his taxable account so why weren’t they transferred via “the transfer on death” process instigated by the mutual fund beneficiary?

Why did the estate attorney do it?

They were set up as “transfer on death”, right?

bill
psteinx
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by psteinx »

OP is confusing.

If the stocks WERE liquidated near the bottom of the COVID crash, then they presumably sat in cash until distribution. No capital gains taxes would be due, typically.

If the stocks were NOT liquidated, but rather, held in-kind (as stocks), then yes, there will likely be capital gains, if they are sold now (since the basis would be the low basis from the bottom of the crash). BUT, paying 15% or whatever in cap gains on large cap gains is nice, because if the assets had been in cash, there'd be ~no gains. 85% of a big market rise is better than 0% of a big market rise. And if the stocks are distributed in-kind to the heirs, then they may not need to sell them, and there could be zero gains upon distribution (the gains would be deferred until individual heirs sold their positions).
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Lee_WSP
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

Soon2BXProgrammer wrote: Fri Oct 15, 2021 1:42 pm
Lee_WSP wrote: Fri Oct 15, 2021 1:31 pm You only owe taxes when you sell the asset.

I fail to see how the result would be any different had the shares been transferred in kind. You’d still have a large capital gain since the basis is set at date of death.
What i have seen elsewhere, is some people liquidate the estate quickly, then they on paper account for their inheritance as cash/bonds in their asset allocation, then they make their own retirement accoutns more stock heavy to make up for it.

But you are right, this is all just a timing issue of when its taxed, and if the estate would have sold, unless they also took the above strategy, they would have less money then they have now, with the gains/taxes.
If OP was complaining about missing out on the massive rebound, I can see that and my response would have been, “but it could have gone the other way with no means of harvesting the losses”. However, OP specifically complains of having cap gains. Which would have been the result regardless of the decisions made, thus it doesn’t matter at all whether the shares were transferred in kind or not.

Unless OP meant the executor waited until this year or so to finally liquidate the shares (perhaps probate courts have been slow). In which case, the cap gains are paid out of the estate.

In which case, other than acting faster, there was not much to do.

In other words:
OP’s issue is with the timing, not the advice in either case.
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arcticpineapplecorp.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by arcticpineapplecorp. »

this is my assumption (i could be wrong).

Let's say there was $1 million in the acct in Jan 2020, then it fell 30% when he died at the bottom in March 2020.

He died with $700k.

That would have been the cost basis for the beneficiaries.

Now the market's gone up almost 100% from March 20, 2020 to now:

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

so the beneficiaries have $1.4 million now.

But if the stock is sold now, the beneficiaries have a $700k capital gain, to pay, right?

If the stock had been transferred IN KIND (either then OR now) taxes would be continue to be avoided temporarily or delayed until beneficiaries sell their stock at a future date.

if the stock is transferred in kind now, the basis is stilll $700k and the cap gain would be $700k if sold now, or more or less if sold later for a higher or lower value, respectively.

So isn't this why the OP is upset, rightfully so?
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khunron
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by khunron »

Did the lawyer tell you to hold the assets ~18 months from time of death before you liquidated? If so, he gave you bad advice. You owe all those capital gains taxes because of the length of time between death and liquidation, and the market rebounded quite substantially during that time. It's really a first-world problem in that your paying what you consider a lot of taxes due to gains on the investments. I'll pay the taxes if you'll send me a check for the capital gains.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by pizzy »

Serendipitous wrote: Fri Oct 15, 2021 12:04 pm Dear Bogleheads:
I need your help with something that’s been nagging at me. My father died in the pit of the Covid Crash. As a buy-and-hold investor he would have found it ironic (and wholly appropriate) that the one time he inadvertently tried to time the market it went so badly.

Working with an estate lawyer, his heirs began settling his affairs. The lawyer advised us to liquidate his Vanguard mutual funds. I asked about in-kind distributions since I planned to put my share in Vanguard but the lawyer said it was far too complicated. Better to liquidate and divide the cash.

Fast forward to today and my dad’s heirs have a massive capital gains bill because of the difference between the stepped-up basis on his date of death and the date of sale.

I have read many in the forums here arguing that an executor should liquidate and disburse cash for fiduciary reasons. But we are now all facing a massive (for us) tax bill. I can’t roll back the clock but I would like to know if the lawyer did right by us or completely erred with the advice they gave us.

Many thanks in advance for sharing your wisdom!
I can’t help but get the feeling that this is akin to someone complaining about taxes after winning the lottery.
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pizzy
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by pizzy »

khunron wrote: Fri Oct 15, 2021 2:14 pm Did the lawyer tell you to hold the assets ~18 months from time of death before you liquidated? If so, he gave you bad advice. You owe all those capital gains taxes because of the length of time between death and liquidation, and the market rebounded quite substantially during that time. It's really a first-world problem in that your paying what you consider a lot of taxes due to gains on the investments. I'll pay the taxes if you'll send me a check for the capital gains.
May have been “bad” advice with the unknown. But hindsight shows it was excellent advice. I still can’t figure out what OP’s problem is.
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bsteiner
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by bsteiner »

It sounds like the original poster is saying that his father died near the bottom of the market in 2020, and by the time the executors were able to sell the assets they had recovered in value so there was a large capital gain. Please let us know if that's incorrect.

It's easier to sell the assets and distribute cash. It also protects the executors from criticism if the assets went down in value, especially if there will be a large estate tax payment due 9 months after death.

If the estate will go on for a while, that results in the money being invested differently from how the beneficiaries would invest the money if it were distributed. To protect against that, the executors could ask the beneficiaries to consent to their keeping the assets invested.

In this case, it sounds like the assets rebounded in value before the executors had a chance to sell them. In that case, selling them would result in a large capital gains tax (since the increase from the bottom of the market in the spring of 2020 until now has been substantial). On the other hand, if they were to distribute the assets in kind, the beneficiaries would have a capital gain if they were to sell them.

We have this in one of our estates. The decedent died early in 2020 but for various reasons it took longer than usual to begin the estate administration. The S&P 500 is up about 36% since then. However, there's a potpourri of stocks and some not very low cost funds, one beneficiary is a trust with a corporate trustee which will have its own investment approach, and the other beneficiaries want simpler portfolios. The executor consulted with the beneficiaries, and they all wanted the executor to sell the assets and distribute cash, notwithstanding the capital gains taxes. If the assets were a few low cost index funds, they may have preferred distributions in kind.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by psteinx »

bsteiner wrote: Fri Oct 15, 2021 2:23 pm The executor consulted with the beneficiaries, and they all wanted the executor to sell the assets and distribute cash, notwithstanding the capital gains taxes. If the assets were a few low cost index funds, they may have preferred distributions in kind.
I can think of 2 main reasons for this:
1) Simplifies things especially for unsophisticated heirs (who may be intimidated by receiving unfamiliar investments), and/or if the amounts are small and widely distributed
2) Reduces risk exposure from the time of sale to the time of distribution (which may be what - days, weeks, months, occasionally years?)

But, it also puts the assets into cash, which is, IMO, a pretty mediocre investment at the moment.

If it were me, and I KNEW that distributions couldn't be made for 3 more months, I'd generally prefer the assets be left in somewhat suboptimal funds and the like, then distributed in-kind, versus sold to cash now and sitting in cash for 3 months. Selling off some mediocre funds (or not), in 3 months would not be so bad, and staying in the market, plus having greater control of taxation issues would be a positive.

Maybe I'm unusual in this regard...
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by bsteiner »

psteinx wrote: Fri Oct 15, 2021 2:37 pm
bsteiner wrote: Fri Oct 15, 2021 2:23 pm The executor consulted with the beneficiaries, and they all wanted the executor to sell the assets and distribute cash, notwithstanding the capital gains taxes. If the assets were a few low cost index funds, they may have preferred distributions in kind.
I can think of 2 main reasons for this:
1) Simplifies things especially for unsophisticated heirs (who may be intimidated by receiving unfamiliar investments), and/or if the amounts are small and widely distributed
2) Reduces risk exposure from the time of sale to the time of distribution (which may be what - days, weeks, months, occasionally years?)

But, it also puts the assets into cash, which is, IMO, a pretty mediocre investment at the moment.

If it were me, and I KNEW that distributions couldn't be made for 3 more months, I'd generally prefer the assets be left in somewhat suboptimal funds and the like, then distributed in-kind, versus sold to cash now and sitting in cash for 3 months. Selling off some mediocre funds (or not), in 3 months would not be so bad, and staying in the market, plus having greater control of taxation issues would be a positive.

Maybe I'm unusual in this regard...
That is in fact what they wanted and what the executor is doing. The asset allocation was about what the beneficiaries want. The executor sold some of the assets and made a partial distribution, and will sell additional assets when she's ready to make additional distributions.
WhyNotUs
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by WhyNotUs »

Serendipitous wrote: Fri Oct 15, 2021 12:04 pm Dear Bogleheads:

Fast forward to today and my dad’s heirs have a massive capital gains bill because of the difference between the stepped-up basis on his date of death and the date of sale.

I have read many in the forums here arguing that an executor should liquidate and disburse cash for fiduciary reasons. But we are now all facing a massive (for us) tax bill. I can’t roll back the clock but I would like to know if the lawyer did right by us or completely erred with the advice they gave us.
In my somewhat limited experience, this is typical. BSteiner works in this field and has great perspective. I have served as executor on four estates now (hopefully not again).

Let's say that your share of your father's stocks were worth $1M at date of his passing. A burst in the market leads to them increasing to $1.3M before the sale occurs. You now have a sale with $300k in capital gains (presumably long). If you make less than $200k in household income, then you would owe about $45k on those gains and have a net gain of $255k, not too shabby in my book.

If the equities had been sold and put into a money market until the appropriate time for distribution, then the million dollars would have earned less than $5k. That income would be taxed at your normal rate.

From my perspective, the situation is a blessed accident. I would buy the person a bottle of scotch.
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Serendipitous
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Serendipitous »

Friends:
Thank you for the excellent ideas, feedback and perspective.

First and foremost, I do truly feel fortunate to have this problem. It's a good problem to have (owing taxes because assets went up).

I guess the crux of my question is whether we were given good advice (or not) by our lawyer given what we knew back then. (Yes, everything is easy in hindsight.) Indeed, the lawyer told us to liquidate the assets. However, the process took 4-5 months while the executor got control of the different accounts. So, between date of death in April 2020 and liquidation in Sept 2020 the valuation rose dramatically. Had the assets been transferred in kind to beneficiaries, my understanding is that it would not have triggered a taxable event. Since the beneficiaries just rolled the assets back into Vanguard as my dad would have wanted them to do, it seems we could have avoided capital gains taxes entirely (in the present) that way.

I may be missing some key point here, so feel free to point it out. (I'm sure you will :happy )

I really appreciate the different points of view here.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by calmaniac »

Serendipitous wrote: Fri Oct 15, 2021 4:07 pm Friends:
Thank you for the excellent ideas, feedback and perspective.

First and foremost, I do truly feel fortunate to have this problem. It's a good problem to have (owing taxes because assets went up).

I guess the crux of my question is whether we were given good advice (or not) by our lawyer given what we knew back then. (Yes, everything is easy in hindsight.) Indeed, the lawyer told us to liquidate the assets. However, the process took 4-5 months while the executor got control of the different accounts. So, between date of death in April 2020 and liquidation in Sept 2020 the valuation rose dramatically. Had the assets been transferred in kind to beneficiaries, my understanding is that it would not have triggered a taxable event. Since the beneficiaries just rolled the assets back into Vanguard as my dad would have wanted them to do, it seems we could have avoided capital gains taxes entirely (in the present) that way.

I may be missing some key point here, so feel free to point it out. (I'm sure you will :happy )

I really appreciate the different points of view here.
OP, thanks for adding those details. The basis would be pegged to the date of death, so even if the stock were transferred in kind, eventually you would still be on the hook for the difference in capital gains from April 2020 through Sept 2020 (and any additional cap gains if you held on into the future). You would not have "avoided capital gains taxes entirely", but would have had more control of them.

My condolences on the loss of your father.
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donall
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by donall »

In some circumstances, can’t assets be valued 6 months after the date of death?
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

Serendipitous wrote: Fri Oct 15, 2021 4:07 pm Friends:
Thank you for the excellent ideas, feedback and perspective.

First and foremost, I do truly feel fortunate to have this problem. It's a good problem to have (owing taxes because assets went up).

I guess the crux of my question is whether we were given good advice (or not) by our lawyer given what we knew back then. (Yes, everything is easy in hindsight.) Indeed, the lawyer told us to liquidate the assets. However, the process took 4-5 months while the executor got control of the different accounts. So, between date of death in April 2020 and liquidation in Sept 2020 the valuation rose dramatically. Had the assets been transferred in kind to beneficiaries, my understanding is that it would not have triggered a taxable event. Since the beneficiaries just rolled the assets back into Vanguard as my dad would have wanted them to do, it seems we could have avoided capital gains taxes entirely (in the present) that way.

I may be missing some key point here, so feel free to point it out. (I'm sure you will :happy )

I really appreciate the different points of view here.
The advice was perfectly in line with what is normally advised. The only improvement may have been to suggest consulting with the beneficiaries and asking if they would like the executor to hold onto the assets until just before distribution. Ie, liquidate just before distribution thereby staying invested as long as possible.

The problem with that approach is what to do if there is a dissenter(s).
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Soon2BXProgrammer »

Lee_WSP wrote: Fri Oct 15, 2021 1:58 pm Unless OP meant the executor waited until this year or so to finally liquidate the shares (perhaps probate courts have been slow). In which case, the cap gains are paid out of the estate.
This is for my knowledge, because I don't typically deal with estates, is distributing the full amount of money and then distributing the gain on a K1 to the recipient not an option? (taking an estate income taxes 1041 class is on my list, but it hasn't happened yet.)
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

Soon2BXProgrammer wrote: Fri Oct 15, 2021 5:06 pm
Lee_WSP wrote: Fri Oct 15, 2021 1:58 pm Unless OP meant the executor waited until this year or so to finally liquidate the shares (perhaps probate courts have been slow). In which case, the cap gains are paid out of the estate.
This is for my knowledge, because I don't typically deal with estates, is distributing the full amount of money and then distributing the gain on a K1 to the recipient not an option? (taking an estate income taxes 1041 class is on my list, but it hasn't happened yet.)
Yes, you would typically pass through the income. I was answering OP colloquially as in OP is still ahead.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Leesbro63 »

This is an interesting situation. I might be an outlier here, but I actually think the lawyer DID make at least a minor mistake. Anyone with any financial savvy would have seen what happened in 2020 and should have considered how that might be different than in less volatile financial times. Distributing brokerage assets in kind is easy. In fact, it may be easier than selling in the estate and having to do all that reporting. The good news is that the estate didn't sell at the bottom then see a huge rebound that the heirs missed. But, yes, in my non-lawyer opinion the lawyer for the estate should have known enough to give the heirs the option to defer or maybe totally avoid capital gains taxes (on asset value increases that happened after the date of death of the decedent). Is this legal malpractice? I'm not qualified to know, but if I were an heir, I'd certainly look into that.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by mikejuss »

Isn't there a step-up basis for heirs who inherent funds within a brokerage account, OP? Why would you have a massive tax bill after selling? I hope you're doing all right otherwise.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Leesbro63 »

calmaniac wrote: Fri Oct 15, 2021 4:20 pm OP, thanks for adding those details. The basis would be pegged to the date of death, so even if the stock were transferred in kind, eventually you would still be on the hook for the difference in capital gains from April 2020 through Sept 2020 (and any additional cap gains if you held on into the future). You would not have "avoided capital gains taxes entirely", but would have had more control of them.

My condolences on the loss of your father.
I believe this might be inaccurate. If the heir(s) had their own long term investment plan, holding these newly inherited assets until death would have allowed them to avoid capital gains taxes entirely under current law. I think this is a big lawyering boo-boo. Shouldn't a good estate lawyer know enough to advise clients who see a huge gain during the estate administration period?
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Retired Bill »

Most estates I've been involved with that had a significant amount of marketable securities were distributed in-kind. This then moves the decision whether to sell or hold to each beneficiary. To make it as easy as possible on the executor, each beneficiary will open an account with the same broker the decedent's account was with and the in-kind distribution will not take place until all beneficiaries have opened accounts.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by stan1 »

Retired Bill wrote: Fri Oct 15, 2021 5:34 pm Most estates I've been involved with that had a significant amount of marketable securities were distributed in-kind. This then moves the decision whether to sell or hold to each beneficiary. To make it as easy as possible on the executor, each beneficiary will open an account with the same broker the decedent's account was with and the in-kind distribution will not take place until all beneficiaries have opened accounts.
This has also been the way it has worked in our family with ToD accounts, even with less than significant assets. Each heir got an account with their pro rata share of the holdings and they were able to do with it what they wanted. It did take up to several months but the holdings were in the market during that time not sitting in cash. Brokerages do this all the time, it is not an exception to their normal processes. I also agree it makes it easier for the executor.

Following through with OP's situation had the executor directed that father's estate be liquidated on or about March 26, 2020 and heirs didn't get their cash for 4-6 weeks they would have been quite upset at the executor for selling at a market low.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Leesbro63 »

Retired Bill wrote: Fri Oct 15, 2021 5:34 pm Most estates I've been involved with that had a significant amount of marketable securities were distributed in-kind. This then moves the decision whether to sell or hold to each beneficiary. To make it as easy as possible on the executor, each beneficiary will open an account with the same broker the decedent's account was with and the in-kind distribution will not take place until all beneficiaries have opened accounts.
I was recently involved with a situation like this and it worked exactly this way.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by bsteiner »

donall wrote: Fri Oct 15, 2021 5:00 pm In some circumstances, can’t assets be valued 6 months after the date of death?
Yes, if that would reduce both the value of the estate and the amount of the estate tax.
Lee_WSP wrote: Fri Oct 15, 2021 5:05 pm ... The only improvement may have been to suggest consulting with the beneficiaries and asking if they would like the executor to hold onto the assets until just before distribution. Ie, liquidate just before distribution thereby staying invested as long as possible.

The problem with that approach is what to do if there is a dissenter(s).
Another possibility, if that's what the beneficiaries want, is to distribute the assets in kind.
Soon2BXProgrammer wrote: Fri Oct 15, 2021 5:06 pm
Lee_WSP wrote: Fri Oct 15, 2021 1:58 pm Unless OP meant the executor waited until this year or so to finally liquidate the shares (perhaps probate courts have been slow). In which case, the cap gains are paid out of the estate.
This is for my knowledge, because I don't typically deal with estates, is distributing the full amount of money and then distributing the gain on a K1 to the recipient not an option? (taking an estate income taxes 1041 class is on my list, but it hasn't happened yet.)
In general, the capital gains are taxable to the estate except in the final year of the estate.

The courts were slower than usual due to the pandemic. They had a much larger than usual number of new estates, and they've been working from home to some degree. However, in most states, once the Will is admitted to probate and the executor has been appointed, the executor may sell assets and make distributions.
Leesbro63 wrote: Fri Oct 15, 2021 5:27 pm This is an interesting situation. I might be an outlier here, but I actually think the lawyer DID make at least a minor mistake. Anyone with any financial savvy would have seen what happened in 2020 and should have considered how that might be different than in less volatile financial times. Distributing brokerage assets in kind is easy. In fact, it may be easier than selling in the estate and having to do all that reporting. The good news is that the estate didn't sell at the bottom then see a huge rebound that the heirs missed. But, yes, in my non-lawyer opinion the lawyer for the estate should have known enough to give the heirs the option to defer or maybe totally avoid capital gains taxes (on asset value increases that happened after the date of death of the decedent). Is this legal malpractice? I'm not qualified to know, but if I were an heir, I'd certainly look into that.
It was something to consider. The market is up substantially since then. The beneficiaries might retain some or all of the securities and mutual funds even if they might not have otherwise purchased them.

To put this in perspective, executors don’t always involve their lawyers in this.
Leesbro63 wrote: Fri Oct 15, 2021 5:31 pm ... If the heir(s) had their own long term investment plan, holding these newly inherited assets until death would have allowed them to avoid capital gains taxes entirely under current law. I think this is a big lawyering boo-boo. Shouldn't a good estate lawyer know enough to advise clients who see a huge gain during the estate administration period?
Yes, but many people prefer low cost to good.
Last edited by bsteiner on Fri Oct 15, 2021 8:50 pm, edited 1 time in total.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by arcticpineapplecorp. »

donall wrote: Fri Oct 15, 2021 5:00 pm In some circumstances, can’t assets be valued 6 months after the date of death?
yes, but it probably doesn't fit here because:
Taxes on the transfer of wealth upon death can be substantial. The tax burden, which is typically based on the value of the estate assets on the date of death, can be additionally painful if the value of the transferred assets declines in value after the date of death. In extreme cases, the tax on an asset at the date of death could exceed the value of the asset just a few months later. In cases like this, IRS Code Section 2032 allows for estates to elect an alternate valuation date if the value of the assets held by the estate decrease in value after the date of death.

Availability of the Election

In general, the alternate valuation election is available if the following requirements are met:

The estate must be subject to federal estate tax (in 2020, estates greater than $11,580,000 are subject to federal tax)
The use of the alternate date must reduce the value of the gross estate and the amount of federal estate tax due


Date of Alternate Valuation

If the alternate date is elected, all estate assets are valued six months after the date of death. The exception to this is if an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death. In this case, the asset is valued as of the date of disposition.

Valuing the Assets

If the alternate valuation is elected, the values of the assets on both the date of death and the alternate valuation date must be determined and shown on the return to demonstrate the circumstances meet the above requirements. If a business interest is part of the estate, a qualified appraisal of the interest must be completed as of both dates.

Should You Elect?

The advantages of using the alternative date are clear. Lowering the value of the gross estate (a requirement for the election) lowers the resulting estate tax. Seems automatic, right? Electing the alternate date is not always a clear answer. If the election is made, the basis in the assets that are transferred to the beneficiaries is set at the lower, alternate value. The future income tax consequences of this drop-in basis should be considered before making the election. Attention should be given to the following factors on an asset-by-asset basis:

The estate tax bracket
Whether the unlimited marital deduction is available
The future tax benefits available on any depreciable assets
Whether the assets will be sold by the estate or beneficiary during his/her lifetime
https://www.otcpas.com/advisor-blog/ele ... state-tax/
doesn't sound like the estate exceeded the estate tax amount and the value of assets didn't decrease after death, they increased.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by tibbitts »

stan1 wrote: Fri Oct 15, 2021 5:42 pm
Retired Bill wrote: Fri Oct 15, 2021 5:34 pm Most estates I've been involved with that had a significant amount of marketable securities were distributed in-kind. This then moves the decision whether to sell or hold to each beneficiary. To make it as easy as possible on the executor, each beneficiary will open an account with the same broker the decedent's account was with and the in-kind distribution will not take place until all beneficiaries have opened accounts.
This has also been the way it has worked in our family with ToD accounts, even with less than significant assets. Each heir got an account with their pro rata share of the holdings and they were able to do with it what they wanted. It did take up to several months but the holdings were in the market during that time not sitting in cash. Brokerages do this all the time, it is not an exception to their normal processes. I also agree it makes it easier for the executor.

Following through with OP's situation had the executor directed that father's estate be liquidated on or about March 26, 2020 and heirs didn't get their cash for 4-6 weeks they would have been quite upset at the executor for selling at a market low.
My guess is that with ToD it's standard to create an account for the beneficiary and transfer-in-kind; that's how the ToD I received worked and that's sort of implied in the process. It's also how the trust assets transferred to me, where I was the sole beneficiary. But I can see that being much less commonly done with a will where an estate has to be divided up by an executor and distributed. While it might not be the most complicated task in the world, it's more complicated than just cashing everything out, and dividing up the proceeds. I can't speak to the time delays but I know that for me it took months to get all the accounts moved to my name; for example with both the brokerage and annuity accounts, there were issues with the different state residences, plus a lack of cooperation from the full-service brokerage.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Soon2BXProgrammer »

bsteiner wrote: Fri Oct 15, 2021 5:51 pm
Soon2BXProgrammer wrote: Fri Oct 15, 2021 5:06 pm
Lee_WSP wrote: Fri Oct 15, 2021 1:58 pm Unless OP meant the executor waited until this year or so to finally liquidate the shares (perhaps probate courts have been slow). In which case, the cap gains are paid out of the estate.
This is for my knowledge, because I don't typically deal with estates, is distributing the full amount of money and then distributing the gain on a K1 to the recipient not an option? (taking an estate income taxes 1041 class is on my list, but it hasn't happened yet.)
In general, the capital gains are taxable to the estate except in the final year of the estate.

The courts were slower than usual due to the pandemic. They had a much larger than usual number of new estates, and they've been working from home to some degree. However, in most states, once the Will is admitted to probate and the executor has been appointed, the executor may sell assets and make distributions.
So, if when someone sells in a timely manner, it is taxed to the estate assuming that the estate doesn't close that year. However, there shouldn't be much tax because the cost basis was just reset.

If something occurs and a delay happens and a large gain is captured, it would be important for the estate to close in the year of the gain? So that passthrough occurs? assuming the beneficiaries have a much lower tax rate then the estate would?

How do hard to value/slow to sell assets like realestate work? Is there an assumption that the sales price is the basis as long as the property was actively trying to be sold? or?
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by celia »

Serendipitous wrote: Fri Oct 15, 2021 4:07 pm I guess the crux of my question is whether we were given good advice (or not) by our lawyer given what we knew back then. (Yes, everything is easy in hindsight.) Indeed, the lawyer told us to liquidate the assets.
This is standard advice for a lawyer to give. Of course, depending on what happens to the markets in the future, some beneficiaries would have wanted their share in cash, while others would want it in-kind.

What if the markets had dropped to half their value after your dad died? Would the beneficiaries have wanted their shares in-kind or would they be glad they had been sold? Or would they wish they had the cash, and risk the markets going up while things were being liquidated. This is a case, of "you can't win" since the markets can do opposite of what gives you the best result.
However, the process took 4-5 months while the executor got control of the different accounts. So, between date of death in April 2020 and liquidation in Sept 2020 the valuation rose dramatically.
Do you wish you didn't have this gain? (That is the alternate that would have prevented this predictament.) With the gain, the beneficiaries can sell and use part of the gains to pay the taxes. They would still come out ahead compared to sitting in cash. And if the markets had gone down in the meanwhile, they could just ride it out or realize losses, if it benefits them.
Had the assets been transferred in kind to beneficiaries, my understanding is that it would not have triggered a taxable event. Since the beneficiaries just rolled the assets back into Vanguard as my dad would have wanted them to do, it seems we could have avoided capital gains taxes entirely (in the present) that way.
No-one would be avoiding the taxes. They would just be deferred until shares were sold. The gains would likely be even bigger if someone held their shares for a long time. (On the other hand, if they never sold, their own estate could give the shares another step-up in value.)

If the executor sold the assets, why isn't the estate paying the taxes before doing the distribution? If the estate had done that, that would have left less for you to inherit, similar to you selling it yourself and losing some to taxes.

Given all these possibilities, it still looks like the beneficiaries came out ahead (compared to not receiving an inheritance), regardless of past decisions.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by increment »

tibbitts wrote: Fri Oct 15, 2021 6:09 pm My guess is that with ToD it's standard to create an account for the beneficiary and transfer-in-kind
I'd guess that it is invariably the case, because the institution wants to retain the assets under management, and requiring beneficiaries to have accounts is the first step.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

celia wrote: Fri Oct 15, 2021 6:31 pm
If the executor sold the assets, why isn't the estate paying the taxes before doing the distribution? If the estate had done that, that would have left less for you to inherit, similar to you selling it yourself and losing some to taxes.
Compressed tax brackets would result in a higher potential tax bill.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by stan1 »

increment wrote: Fri Oct 15, 2021 6:42 pm
tibbitts wrote: Fri Oct 15, 2021 6:09 pm My guess is that with ToD it's standard to create an account for the beneficiary and transfer-in-kind
I'd guess that it is invariably the case, because the institution wants to retain the assets under management, and requiring beneficiaries to have accounts is the first step.
Yes they do that. In-laws had account at their local Merrill Lynch office. Service after their passing was very good until we had to tell them to transfer the shares into a MerrillEdge account not a wealth management account with AUM fee.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by tibbitts »

Lee_WSP wrote: Fri Oct 15, 2021 6:57 pm
celia wrote: Fri Oct 15, 2021 6:31 pm
If the executor sold the assets, why isn't the estate paying the taxes before doing the distribution? If the estate had done that, that would have left less for you to inherit, similar to you selling it yourself and losing some to taxes.
Compressed tax brackets would result in a higher potential tax bill.
So if the estate sells the shares, it automatically passes the taxes through to the recipients? Or has a choice to?
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Lee_WSP »

tibbitts wrote: Fri Oct 15, 2021 7:33 pm
Lee_WSP wrote: Fri Oct 15, 2021 6:57 pm
celia wrote: Fri Oct 15, 2021 6:31 pm
If the executor sold the assets, why isn't the estate paying the taxes before doing the distribution? If the estate had done that, that would have left less for you to inherit, similar to you selling it yourself and losing some to taxes.
Compressed tax brackets would result in a higher potential tax bill.
So if the estate sells the shares, it automatically passes the taxes through to the recipients? Or has a choice to?
If it distributes the income that year it's reported on the 1041 as a distribution and the accompanying notice is given to the beneficiaries. The problem as Bruce has alluded to already, is if the estate lasts longer than a taxable year. At that point, you could petition the judge for an early distribution.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by tibbitts »

Lee_WSP wrote: Fri Oct 15, 2021 7:41 pm
tibbitts wrote: Fri Oct 15, 2021 7:33 pm
Lee_WSP wrote: Fri Oct 15, 2021 6:57 pm
celia wrote: Fri Oct 15, 2021 6:31 pm
If the executor sold the assets, why isn't the estate paying the taxes before doing the distribution? If the estate had done that, that would have left less for you to inherit, similar to you selling it yourself and losing some to taxes.
Compressed tax brackets would result in a higher potential tax bill.
So if the estate sells the shares, it automatically passes the taxes through to the recipients? Or has a choice to?
If it distributes the income that year it's reported on the 1041 as a distribution and the accompanying notice is given to the beneficiaries. The problem as Bruce has alluded to already, is if the estate lasts longer than a taxable year. At that point, you could petition the judge for an early distribution.
Thanks; I think/hope I knew that when I was dealing with the 1041. But that was ty2016 so hopefully water under the bridge either way at this point. The amounts were tiny compared to what the OP is dealing with.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by afan »

Assuming we have it right:
Death during the depth of the COVID downturn.
Fund were held until a substantial recovery, then sold,
Then the taxes would be the same whether the funds were distributed in kind and sold on date X by the heirs or held in the estate account and sold on date X. In either case, the gains would be based on the price at the time of sale vs the price on the date of death.

If there was a delay because the executor did not have the authority to sell on the date of death and stocks went up a lot between date of death and when the executor was able to take over:
There is an alternate valuation 6 months after the date of death. That may be worth investigating in this case.

If the concern is the delay between date of death and when the executor had control, this would be yet another reason to have a funded living trust. The trustee would be able to sell the funds on the date of death if they knew in time. Or the next trading day if they did not. No delay in getting authority to act.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by humblecoder »

OP: My condolences on your loss.

I am not a lawyer.

My understanding is that the executor's job is to preserve the assets for the good of the heirs so that they can be distributed. If one holds the shares and they drop, then one can argue that the executor failed in their duty to protect the assets of the estate. If one sells the shares and they subsequently rise, I think that puts the executor on firmer ground since they can say that they acted to preserve the existing asset value as it was at the time of death. So if I were the executor, I'd probably do the same in the interest of conservatism.

Also, let's say the estate had shares of different stocks. If you distribute the stocks in-kind, are there going to be arguments when Johnny got shares that tank in a year while Jane got shares that double in value? Or what if Johnny and Jane both want the same shares?

And how do you make sure that the capital gains is equitably distributed? Do you now need to make sure that everybody gets shares with equal cost basis? If the deceased had shares of A, B, C, D, etc how do you even do that? Somebody is going to end up unhappy because they had a bigger tax bill than somebody else.

No, if it were me as executor, the cleanest, fairest, and more equitable way would be to sell and distribute cash. Much cleaner and fewer arguments and potential liabilities. Sure, you might end up in a situation where holding would have been better, but as we know, you cannot predict what way the market is going to go. To criticize is Monday morning quarterbacking.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Joey Jo Jo Jr »

It sounds like definitively bad advice to me. If the executor is going to liquidate, then at the very least do it while the FMV is close to tax basis. But once there has been a big run up it should have been distributed in kind to the extent not needed for administration costs. Let the beneficiaries decide if they want to liquidate immediately, over time, donate to charity (no tax event), or hold until death for another basis step up under current law. In fact, I believe the uniform probate code may have a preference for in kind distribution in general. At least my state that is based on the UPC does.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by increment »

afan wrote: Fri Oct 15, 2021 9:30 pm If the concern is the delay between date of death and when the executor had control, this would be yet another reason to have a funded living trust. The trustee would be able to sell the funds on the date of death if they knew in time. Or the next trading day if they did not. No delay in getting authority to act.
If trusteeship has to be transferred from the deceased to a successor trustee, a delay seems likely. Wouldn't the fund company or brokerage ask for a death certificate, at least?
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Leesbro63 »

I keep reading posts here that discuss the merits of selling the shares in the estate then distributing the cash. Here’s what’s missing: the actual situation. It may be that it’s generally cleaner/easier to sell shares and distribute the cash. But in my humble, not-a-lawyer opinion, the lawyer should have known enough to review the situation before hitting the sell button and to recognize that this was unique because the shares had a big capital gain/taxable event since death. It’s particularly bad because readily marketable securities are easy to transfer in kind, unlike a building or valuable painting being split by multiple heirs.

Whether selling or distributing in kind is preferable, in general, made no difference on the date of this sale. I would have wanted my lawyer to advice, in this situation, there was an option to defer or maybe even avoid capital gains tax.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by WhyNotUs »

Leesbro63 wrote: Sat Oct 16, 2021 5:37 am It may be that it’s generally cleaner/easier to sell shares and distribute the cash. But in my humble, not-a-lawyer opinion, the lawyer should have known enough to review the situation before hitting the sell button and to recognize that this was unique because the shares had a big capital gain/taxable event since death. It’s particularly bad because readily marketable securities are easy to transfer in kind, unlike a building or valuable painting being split by multiple heirs.
I don't think we want lawyers or personal representatives trying to time the market.

The OP was asking if this was common practice and in my limited experience, the answer is yes when there are multiple inheritors. If there is a single one, then I believe it would be less complex.

Imagine a portfolio of 10 funds with values that change daily and 5 married heirs set to receive those funds. That is a dynamic that can eat up quite a bit of time and potential drama. If it is all in one fund, that is a different story.
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Re: Did Our Lawyer Give Us Good or Bad Estate Advice?

Post by Leesbro63 »

WhyNotUs wrote: Sat Oct 16, 2021 8:20 am
Leesbro63 wrote: Sat Oct 16, 2021 5:37 am It may be that it’s generally cleaner/easier to sell shares and distribute the cash. But in my humble, not-a-lawyer opinion, the lawyer should have known enough to review the situation before hitting the sell button and to recognize that this was unique because the shares had a big capital gain/taxable event since death. It’s particularly bad because readily marketable securities are easy to transfer in kind, unlike a building or valuable painting being split by multiple heirs.
I don't think we want lawyers or personal representatives trying to time the market.

The OP was asking if this was common practice and in my limited experience, the answer is yes when there are multiple inheritors. If there is a single one, then I believe it would be less complex.

Imagine a portfolio of 10 funds with values that change daily and 5 married heirs set to receive those funds. That is a dynamic that can eat up quite a bit of time and potential drama. If it is all in one fund, that is a different story.
I think you helped me better focus my issue with many of the replies here. This isn't about timing the market. It's about knowing what will happen once you decide to take action (sell the stocks), regardless of when it is timed. And while you make a good point with your 10 funds/5 married heirs scenario, I believe a good estate attorney would still have an obligation to explain the options and not just "sell all" (and incur a big tax bill for the heirs) because it was more convenient.

This isn't about market timing; it's about giving good advice for the action about to be taken.
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