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  • Given large taxable account but with questionable holdings

    My in-laws were gracious enough to give us a large Schwab taxable account worth $380,000. Unfortunately, the portfolio is made up of individual equities (Exxon Mobil, American Water Works), Gold, or relatively high expense ratio mutual funds (Harding Loevner Emerging Markets, Janus Henderson Growth and Income Fund). The account has gained $80,000 in value. I want to sell these funds and start over with the Schwab total stock market index fund, international index fund, and total bond index fund. We are in the 20% long term capital gains tax bracket, so we expect to pay $16,000 in capital gains taxes. Unless the one gifting the account passes away so that there is a step up in basis, there is no way to avoid paying the 20% capital gains tax in our situation right? We just have to bite the bullet and pay the capital gains tax before we start over with a three fund lazy portfolio? We just want to make sure before we proceed.

  • #2
    The cost basis of stock you received as a gift ("gifted stock") is determined by the giver's original cost basis and the fair market value (FMV) of the stock at the time you received the gift. If the FMV when you received the gift was more the original cost basis, use the original cost basis when you sell.

    Charitable donation?

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    • #3
      Gotcha, thank you Tim. Here's my only concern: my father in law has been managing this account for my wife for years and the account is in her name. It was only this year that he decided to give us joint access to the account and also said we can start managing the account as we please. Do you think we can still spin the account as being "gifted stock" that was given to us this year, even though it's been in my wife's name for many years?

      I hear you about the charitable donation. I am thinking about giving some of the stock to a charity named Center for Enriched Living in Illinois.

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      • #4
        You need to nail down the ownership. Managing is one thing, in her name is another, the primary social security number and titling of the account is another.
        You can't receive a gift of something you already own. When did she own it and what is the basis are your questions. Charitable donations are at FMV regardless of when purchased or basis.

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        • #5
          Assuming that her name has always been on the account since inception, there really aren't a lot of tricks to avoid capital gains besides donating to charity. On the other hand, there's worse things in the world than being 'given' $380k.

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          • #6
            Yeah, $280k would really suck. Geez.
            Congratulations. Your crossed a big big line. You are now in the Circle of Trust. Name on the account. Bet you didn't even realize Dad didn't completely trust you!
            Just teasing, chew on that a little bit.

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            • #7
              Rather than selling all at once I would figure out the basis and do it over several years so as not to bump you into a higher tax bracket. Look at individual lots and figure out if you have any losses. If you do sell right now. Also check if we have a sizable correction.

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              • #8
                Originally posted by Jaime View Post
                Here's my only concern: my father in law has been managing this account for my wife for years and the account is in her name. It was only this year that he decided to give us joint access to the account and also said we can start managing the account as we please. Do you think we can still spin the account as being "gifted stock" that was given to us this year, even though it's been in my wife's name for many years?
                so first off, sounds like she has been/is the sole owner. this is not a gift. this is her assets.
                she has always had access/been able to manage this, clearly dad was still in charge.
                who has been paying the CG taxes each year?

                things to do:
                1- turn off dividend re-investment. everything should be shunted to a MMF.
                2- obviously have them stop adding new money.
                3- look at the cost basis. anything that has a loss, sell right now and place in said MMF.
                4- if you have sizable losses, then you can sell gains to offset those losses.
                5- consider donating the lowest basis lots to charity. tax free for them, tax free for you. social good, etc, etc.
                6- now you wait.....either decided to build the rest of your portfolio around these holdings, sell them off slowly over a few years, use it as your donation pile in a DAF, do nothing......etc

                for my spouses accounts that came from gifts/family/inheritance, etc....they remain the sole name on the account with me only as a beneficiary. it gets co-mingled when they decide to slice off a piece of the pie. just in case thats important......

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                • #9
                  Two issues here:
                  • I agree the acct needs to be rebalanced, but is he relinquishing oversight - totally? Unless he is (i.e., no longer receiving stmts). I would have a careful conversation with him before you make such a bold move. Otherwise, it could easily be perceived as now that the SIL has access, he is totally upending his carefully-considered plan. Might not be perceived in the spirit you intend, if you get my drift.
                  • Unless the sale would put me into the 20% LTCG tax bracket, I would personally rebalance asap. Don't really agree with waiting for a market drop, as the first goal is to grow the account, not minimize taxes (that is the 2nd goal). If a full rebal would put me into the 20% bracket (TI > $479k), I might take advantage of the proximity to year-end and split the rebalance between 2019 and 2020 if that would keep both sets of transaction results in the 15% bracket. Lot to consider, especially if you have pass-through income that would be affected for 199A purposes.
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                  • #10
                    Originally posted by Tim View Post
                    You need to nail down the ownership. Managing is one thing, in her name is another, the primary social security number and titling of the account is another.
                    You can't receive a gift of something you already own. When did she own it and what is the basis are your questions. Charitable donations are at FMV regardless of when purchased or basis.
                    I agree with this. If nothing else your FIL needs to make sure his tax returns are correct.

                    You also need to consider the emotional component here. If dad has been doing things "his way" for 20 years and the account has done well I would tread very carefully on just plowing in and saying "thanks but I'm in indexer."

                    Do I want to own a bunch of individual stocks? Not really. But if someone gave me $100k in Exxon stock I would make sure that they didn't have any emotions wrapped up in my immediately changing the investments. You didn't have this until recently, since this is bonus money I'd much rather have a suboptimal asset allocation and a peaceful Thanksgiving dinner than I would make sure this account is Boglehead-compliant.

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                    • #11
                      Thank you all so much for the replies.

                      My wife's name has been on the account since inception. We are both W2 physicians and will be above the $479K threshold for 20% capital gains this year and in the years to come. Pass thru income and 199A deductions are also not accessible to us as W2s. Fortunately I have had several conversations with my FIL about switching to index funds in the account, and he said that he trusts us and if we want to, then to go ahead. JFox suggests to rebalance ASAP and that taxes are a secondary concern -- would anyone object to this? Now given this info, would anyone keep any of the aforementioned holdings and not switch them to index funds?

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                      • #12
                        The concept of good communication with your FIL before you do anything at all sounds like very wise advice!

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                        • #13
                          Originally posted by Jaime View Post
                          Thank you all so much for the replies.

                          My wife's name has been on the account since inception. We are both W2 physicians and will be above the $479K threshold for 20% capital gains this year and in the years to come. Pass thru income and 199A deductions are also not accessible to us as W2s. Fortunately I have had several conversations with my FIL about switching to index funds in the account, and he said that he trusts us and if we want to, then to go ahead. JFox suggests to rebalance ASAP and that taxes are a secondary concern -- would anyone object to this? Now given this info, would anyone keep any of the aforementioned holdings and not switch them to index funds?
                          that's great.

                          i would go so far as to say that no prudent, regular poster on this forum is going to tell you to hold on to individual stocks, gold, or expensive funds rather than indexing.

                          sounds like it's time to go for it.

                          i'm not the biggest tax genius on this forum but i don't think anything about the tax consequences would hold me back here.

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                          • #14
                            Originally posted by MPMD View Post
                            i would go so far as to say that no prudent, regular poster on this forum is going to tell you to hold on to individual stocks, gold, or expensive funds rather than indexing.
                            If your spouse has stock options or has the ability to buy company stock at a significant discount from market rates, most folks would support that. However, sell the company stock as soon as it's vested and try to maintain no more than 10% of your portfolio in a single publicly traded stock (unless you're a c-level executive where insider selling has to be disclosed and might meaningfully move the share price). This isn't a concern for most W-2 employees here, but some folks do have spouses with stock options or restricted stock units.

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                            • #15
                              Thanks everyone for the responses! Unfortunately my wife doesn't have stock options or the ability to buy company stock at a discount. We will just pull the trigger, sell all the holdings and then buy index funds. I hear you all when you suggested to tread lightly in bringing up indexing. Casually over the past several months I've talked to my FIL about index funds, and he's actually said he's read a lot about them and agrees in making the change. I've made it clear that I am overjoyed to receive such a large account. Relationship with the FIL is as good as it's ever been, as far as I can tell!

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